State Of European Banks: The ECB View Vs Reality
Mike (Mish) Shedlock | Sep 16, 2018 02:47AM ET
The ECB would like you to believe the European banking system is sound and banks are better regulated. They aren't.
Ten years after Lehman there are numerous statements from bureaucrats, academics, media and others that banks are now better regulated, more solid and liquidity problems vanished.
Reader Lars from Norway Emailed this assessment today.
Price/Book Ratio
Deutsche Bank (DE:DBKGn) trades at 0.30 on the low side and BNP Paribas (PA:BNPP) at 0.70 on the high side. In between we have Commerzbank (DE:CBKG) at 0.40, Unicredit (MI:CRDI) at 0.50, and Society General at 0.50.
The verdict is negative.
Target2
Italian and Spanish bank require € 900 billion in liquidity support on a permanent basis.
This element is mostly ignored by academics and others because they do not understand the implications of Target 2 as a capital flight phenomenon. This is a hidden crisis.
The verdict is negative.
Nonperforming Loans
Italian banks would all be insolvent if NPLs were to be written off. In order to keep the facade, NPLs are kept on the books as if it's not a problem.
The verdict is negative.
Proprietary Trading and Derivatives
Some of the banks have huge portfolios, led by Deutsche Bank and BNP Paribas. As much as 45% of total assets.
Nobody knows what a strict mark-to-market exercise would lead to. Most of the derivatives are interest rate swaps that might suffer should rates rise.
The verdict is negative.
Emerging Market and Troubled Bank Exposure
French banks have huge exposures to Italy, and Italian banks have big exposure to Turkey.
The verdict is negative.
Contagion Risk
We learned from 2008 that interbank markets can freeze. Liquidity is no longer available. How much more than the € ,400 billion is the eurosystem willing to provide to insolvent Spanish, Italian and Greek banks?
Conclusion
Its a fools game to predict the future but to claim that banks in Europe are in good shape is far fetched.
Should Deutsche Bank fail we do not know the ramifications. Bundesbank may intervene but confidence will take a serious beating. And we know that everything is based on confidence.
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Just a few thoughts from Oslo as a reaction to numerous naive statements out there on todays situation.
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