European Banking Crisis?

[petec]

Totally agree re: the history of the world. 

 

I disagree on China: I think history suggests that economic collapses are worst when the state is powerful, and less bad when markets are allowed to clear. 

 

I'd extend that to say that inflation isn't the only or the best way out.  Evidence: the 1921 depression.

 

However, because governments are so much more embedded in economies than the US government was in 1921, we can't take that way out, so inflation it will have to be.

 

 

[ni-co]

Yeah. Probably the word "crisis" is overused but I don't really have a better word for it.

 

My overarching hypothesis is that we're still in the 2007 "crisis". The difference is however that the last source of "natural" inflation—China infrastructure spending—has now dried out. Where should regular (not CB induced) inflation now come from? From retiring baby boomers? They have really just begun retiring (the youngest ones are in their early fifties).

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

[petec]

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

 

Me too.

[PatientCheetah]

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

 

Me too.

 

Someone should spend a few weeks in China and do some on the ground research - just like its economy, Chinese stock market is very much bifurcated, many old slowly dying uncompetitive state enterprises, exposed to real estates and heavy industries, and many innovative service oriented private companies winning in many new industries.

[JBTC]

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

 

Me too.

 

Have you looked at the stock prices in Hong Kong? Hong Kong traded Chinese equities are on single digit PE and among the very lowest in the world. Tell me one fund manager who is bullish on China these days.

 

No one is saying China doesn't have a huge issue. The point I was trying to make is that bubbles deflate in different ways.

 

The US way is quick and painful but recovers the fastest. Europeans drag their feet and takes much longer to address the issues. Japanese are even slower. They don't like the excitement of bank failures and massive layoffs. All the pain is spread over decades and endured silently.

 

It looks to me China will be the slowest. That's their way of doing things. They don't like defaults and barely had any in the past 30 years. It's bad for efficiency if they ask you and me. But you and I don't get to run their country.

 

 

[JBTC]

 

Re China: I'm getting more and more convinced that China is the biggest bubble we have ever seen. And the fact that a lot of people are arguing so passionately against that and the whole thing about "we are living in the Chinese century" makes me all the more suspicious.

 

Me too.

 

Someone should spend a few weeks in China and do some on the ground research - just like its economy, Chinese stock market is very much bifurcated, many old slowly dying uncompetitive state enterprises, exposed to real estates and heavy industries, and many innovative service oriented private companies winning in many new industries.

 

True.

 

In China many sectors remain heavily regulated, and this makes the life of entrepreneurs difficult. In Internet related areas, the government is mostly hands off (other than to censor the content and outlaw Google/Facebook/NYT), which has enabled a competitive local industry.

 

Overall, I'd still guess the slowdown has been severe and the future doesn't look bright. What has really discouraged entrepreneurs and global investors is the lack of progress on stated reforms. In some ways the reforms seem to have gone backwards.

 

The problem with most emerging markets including China is they don't have durable systems and economic institutions. So it's generally hard to produce consistent growth over many decades.

 

Larry Summers pointed out that Western countries, using the example of Denmark, didn't necessarily grow super fast to become rich; it grew 3-4% consistently over a century, without spending a lot of time falling back or stagnating.

 

Whereas in emerging markets you see different high fliers at different times, but in the end they fail to make it.

 

 

[petec]

Have you looked at the stock prices in Hong Kong? Hong Kong traded Chinese equities are on single digit PE and among the very lowest in the world.

 

 

Yes, sorry, I'm saying the economy is a bubble, not the market.  I'm actually starting to sniff around for some stocks and would love to hear any recommendations.

 

No one is saying China doesn't have a huge issue.

 

 

Actually a LOT of people are saying exactly that.  In the EMs where I work it is only in the last year that people have even started to entertain the idea that China might have issues.

 

But you and I don't get to run their country.

 

 

Pity ;)

[ni-co]

Then, have a look at DBs derivative book (mostly obscure OTC derivatives) which is the largest or second largest in the world with a nominal amount close to world GDP. They say it's mostly "netted-off" but this is only true as long as no counterparty's failing.

 

This is the more interesting part for me. Granted commodities, have spiked the last few days, but you get an unwind via a bankruptcy of Glencore/Nobel Group the exposure is going to bring someone down with them.

 

I may have underestimated the role those commodity cos play for the European banks. Exposure to the debt of Glencore et al via OTC derivatives could well be the largest fundamental driver behind European banks' share price declines, NIRP and CoCos only adding to it. This would also explain why DB seems to be at the center of this sell-off.

[John Hjorth]

European Union Updates Bank Stress Test Beyond Pass/Fail

 

http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html

[ni-co]

European Union Updates Bank Stress Test Beyond Pass/Fail

 

http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html

 

I'm sure that solves the problem. What they also could do is simply come together and agree that the banks are "rock-solid".

[Gamecock-YT]

Then, have a look at DBs derivative book (mostly obscure OTC derivatives) which is the largest or second largest in the world with a nominal amount close to world GDP. They say it's mostly "netted-off" but this is only true as long as no counterparty's failing.

 

This is the more interesting part for me. Granted commodities, have spiked the last few days, but you get an unwind via a bankruptcy of Glencore/Nobel Group the exposure is going to bring someone down with them.

 

I may have underestimated the role those commodity cos play for the European banks. Exposure to the debt of Glencore et al via OTC derivatives could well be the largest fundamental driver behind European banks' share price declines, NIRP and CoCos only adding to it. This would also explain why DB seems to be at the center of this sell-off.

 

;)

[JBTC]

European Union Updates Bank Stress Test Beyond Pass/Fail

 

http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html

 

Not sure if you guys saw the Martin Wolf article in FT. He suggests the central banks buy bank and corporate debt rather than sovereign debt.

 

[ni-co]

Not sure if you guys saw the Martin Wolf article in FT. He suggests the central banks buy bank and corporate debt rather than sovereign debt.

 

Thanks! Yes, I saw it. Hard to estimate how likely this is. I think the reason the ECB hasn't done it is that it is a tricky political issue. In the end, it would mean using creditor countries' money to rescue European banks in – inter alia – debtor countries. The more this situation is developing into a real crisis and people become aware that this is also threatening banks in creditor countries (like DB and ING) the more politicians may be willing to allow the ECB to do something like that. That said, I don't really see an advantage of buying the debt vs. direct equity infusions.

[ni-co]

Interesting article:

 

Bank capital: Sell-off sparks ‘game over’ fear for AT1

 

The ferocity of the sell-off was shocking. In one week in early February, euro-denominated bank AT1 bonds in Bank of America Merrill Lynch's CoCo index posted almost 7% in excess returns, noted CreditSights. The yield, for example, on an AT1 bond sold by Spain's Banco Popular in early 2015 with a coupon of 8.25% more than doubled to 17.9%, according to S&P Global Market Intelligence.

 

Many took it as a fundamental shift in investors' understanding of what these bonds are: how close they are to equity; how easily banks may be forced to suspend payments. One senior European banker says his bank has already dismissed the instrument from its planning and that the AT1 game is over.

 

Aside from recent worry about the impact of negative rates on profit, new restrictions earlier this year on capital distributions, either AT1 coupons or share dividends, was one harbinger of AT1 realignment. Disappointing 2015 results was another trigger, particularly Deutsche Bank's €7 billion loss. Despite its insistence it can meet its payments, sellers focused on Deutsche Bank, including four AT1 bonds with coupons due at the end of April, whose yield to first call rose beyond 11%, according to CreditSights.

 

http://www.euromoney.com/Article/3531616/Bank-capital-Sell-off-sparks-game-over-fear-for-AT1.html

 

Game over for CoCos. We all know what this means: issuing equity is left as the only sensible option.

[SharperDingaan]

The desperation, and arrogance, of Euro bankers truly continues to amaze.

.... the only place in the world where a stress test has no pass or fail; where were these tests at school!

.... we only test who we think will pass; none of those sleazy Portuguese, Greek, or Italian banks!

…. we test conduct risk – ‘cause it’s insured against!

 

Apparently there is no possibility of the junk assets being repo’d into the excluded banks, in return for treasuries provided by the ECB.

Gotta de-louse DB – somehow!

 

Conduct risk is covered under Directors and Omissions insurance. You would only look at this if you intend to claim big, & you think the claim may be so large – that it could put the counter-party insurers under their capital requirements. Bottom line – collectively the banks don’t think they can raise enough equity to cover forthcoming losses; without access to the CoCo of the AT1 market.

 

The reality of course is that they could issue equity, but there would be so much dilution - that the bank will be controlled by new owners; with different agendas.

 

http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html

http://www.euromoney.com/Article/3531616/Bank-capital-Sell-off-sparks-game-over-fear-for-AT1.html

 

Gentlemen - welcome to the CoCo market.

Its 15%, pay at the door, or PFO! Preferred shares always welcome.

 

SD

 

[ni-co]

I think what we are witnessing here is Germany preparing for the rescue of DB and other German banks:

 

German ‘doom loop’ proposal would hit Italian, Spanish banks

 

Italian and Spanish banks would suffer another blow to their profits if Brussels adopts a German plan to break the “doom loop” that ties together lenders and their governments this year, according to analysts.

 

Since the 2011 European debt crisis laid bare the risks of banks holding large amounts of debt issued by their governments, top eurozone central bankers have repeatedly warned of the need to break this link.

 

Jens Weidmann, the president of the Bundesbank, is pushing a proposal to limit each bank’s holding of sovereign debt from a single country.

 

Among 27 of Europe’s biggest banks, 22 would need to sell about €360bn of sovereign debt exposure and reinvest in other countries’ bonds if the EU caps exposure at a quarter of each bank’s eligible capital, according to Bernstein, the research firm.

 

https://next.ft.com/content/49f1119a-dbdd-11e5-98fd-06d75973fe09

[John Hjorth]

European Union Updates Bank Stress Test Beyond Pass/Fail

 

http://www.nytimes.com/2016/02/25/business/dealbook/european-union-updates-bank-stress-test-beyond-pass-fail.html

 

I wasen't posting any comments to the link above, because while posting I had not made up my what to think about it. I still haven't made up my mind about it, but basicly, my line of thinking is in line with what ni-co and SharperDingaan has posted above after my original post.

 

What's the purpose of stress testing the European banks, if there aren't consequences of not passing the stress test? To me, it's just spin then. It makes less and less sense at to me, the more I think about it.

 

This topic has turned more and more interesting to me along with the new posts. Add to that the ongoing EU/UK situation not particulary covered in this topic.

 

SAN released full financial statements for the year 2015 on 12^th February. The tearing apart the statements af SAN have I not started on yet, I have been a bit lazy in the evenings the last couple of weeks, doing other things. It must wait a bit.

 

What I would like to do now is the following : A top-down "analysis" [hardly an analysis, just a simple record/specification] of the following :

• Sovereign debt held on the balance sheets end of year 2015
  
• Off balance sheet items end of year 2015
  

for the largest European banks, and I will include C, BAC, JPM & WFC [all figures converted to a common functional currency, naturally], and share it with the board.

 

My basis would be this list : http://www.relbanks.com/top-european-banks/assets and take the first 22 banks listed, further more including :

• 22 Danske Bank
  
• 29 Svenska Handelsbanken
  
• 30 DNB Group
  
• 31 SEB,
  

those four last mentioned out of personal interest.

 

Any comments and/or personal wishes?

[Jurgis]

What's the purpose of stress testing the European banks, if there aren't consequences of not passing the stress test?

 

There are consequences.

 

local banking supervisors like the Bank of England and the European Central Bank will use the results to determine whether banks need to take additional action, such as raising capital.

 

[John Hjorth]

What's the purpose of stress testing the European banks, if there aren't consequences of not passing the stress test?

 

There are consequences.

 

local banking supervisors like the Bank of England and the European Central Bank will use the results to determine whether banks need to take additional action, such as raising capital.

Jurgis,

 

That's the proposal, i.e. : more regulation, by a new layer in capital requirements, including, and based on, the stress tests outcomes.

[SharperDingaan]

Everything about this suggests that one or more GSIBs is in very big trouble.

 

A operating loss goes directly against T1 capital via retained earnings.

If you cannot restore the T1 (or AT1) capital via an offsetting equity issue; you have to either 1) improve the quality of the loan book so that it requires less regulatory capital, or 2) shrink the total loan book so that less capital is required. Apparently central banks will not tolerate the level of dilution that would be required; so they are going to let the banks use repo's instead. Gimme back my T-Bills, & take your sh1tty sovereign loans away!

 

Obviously, the PIG DSIBs will become far more toxic than they already are. The good news is that with the repo's, they will now be largely warehousing their own sovereigns debt (lowest capital requirement); were the PIGS to subsequently exit Euroland - the sovereign would be able to extinguish that debt via a cross, & restore them to health almost instantly. A back door martial plan.

 

Greece by itself wasn't enough to force a change; Greece, Portugal, & Italy together - is.

Given that the German finance minister appears to have recently changed his view on martial plans (Soros comments), it also suggests that DB may well be one of the GSIB's in trouble; hence your problem is now finally - my problem.

 

Hopefully we're more or less right.

 

SD

 

 

 

 

 

[John Hjorth]

Bump.

 

I have been thinking quite some about this lately. I would really like, if we could pick up this discussion again, based on recent conditions. How do you perceive the situation now etc.?

[John Hjorth]

Reuters: Italy winds up Veneto banks at cost of up to 17 billion Euros.

 

Finally, Italy has started doing something.

 

- - - o 0 o - - -

 

I was stunned over the cost related to my MILs funeral earlier this year, despite it was modest, however a nice one - I mean, if a funeral even can be nice. It does appear to be no better in Italy, so the advice must be not to have ones funeral there, despite I consider it a real nice place in general.