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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: RJA_ who wrote (64656)	7/10/2010 4:08:42 AM
From: elmatador	Respond to of 217742

The dark secret of Europe's banks They suspect that some of their financial institutions are desperately undercapitalised and ill-equipped to deal with the likely losses from their massive exposures to the debt-laden PIGS (Portugal, Ireland, Greece and Spain). Berlin and Paris worry that publishing the results of the stress tests could trigger a run on some of their weaker banks, as anxious savers rush to withdraw their savings. It was not sub-prime. The system was rotten to the core! The dark secret of Europe's banks Karen Maley Published 4:13 PM, 16 Jun 2010 Last update 9:55 AM, 17 Jun 2010 There’s little wonder that Germany and France are desperately hoping to keep the results of the 'stress tests' being conducted on the major European banks shrouded in secrecy. They suspect that some of their financial institutions are desperately undercapitalised and ill-equipped to deal with the likely losses from their massive exposures to the debt-laden PIGS (Portugal, Ireland, Greece and Spain). Berlin and Paris worry that publishing the results of the stress tests could trigger a run on some of their weaker banks, as anxious savers rush to withdraw their savings. In contrast, the Spanish government is reasonably confident that the two main Spanish banks, Santander and BBVA, have comparatively robust balance sheets and are likely to perform well in the tests. As one Spanish government source confided to the Spanish daily newspaper, El Pais: “If the results of the tests were known there would be more than one surprise”. But while the results of the EU’s stress tests are likely to remain Europe’s dark secret, the latest report from the Bank for International Settlements gives some indication of the size of the problems confronting the French and German banks. The BIS report points out that European banks account for almost two-thirds of all lending to the PIGS, with total exposures of just under $US1.6 trillion. The French and German banks were the dominant lenders, and their combined exposures to the PIGS amounted to $958 billion ($493 billion from French banks, and $465 billion from German banks). Spain was the biggest borrower, with French banks lending $248 billion to Spanish residents, while German banks had total loans of $202 billion. But while the French banks were particularly exposed to the Spanish non-bank private sector, the German bank loans were more skewed towards the Spanish banks. German banks were also heavily exposed to Ireland, with loans totalling $177 billion. And just over two-thirds of these loans were to borrowers in the non-bank private sector. UK banks were the most enthusiastic lenders to Ireland, advancing $230 billion, with more than half of the lending directed to the non-bank private sector. UK banks also had reasonably large exposures ($140 billion) to Spanish borrowers. European bank lending to the eurozone governments was much smaller than the banks’ exposure to the private sector. But again French and German banks were the dominant financiers. According to the BIS report, “these two banking systems had sizeable exposures to the public sectors of Spain ($48 billion and $33 billion, respectively), Greece ($31 billion and $23 billion, respectively) and Portugal ($21 billion and $10 billion, respectively).” The BIS also provided a comparison of the European banks’ exposure to the public sector debt of troubled eurozone countries relative to their capital bases. It said that the combined exposures of the German, French and Belgian banks to the public sectors of Spain, Greece and Portugal amounted to 12.1 per cent, 8.3 per cent and 5.0 per cent respectively of their tier one capital. In comparison, the combined exposure of Dutch and Swiss banks to the same public sector debt was considerably lower. For Dutch banks, the combined exposure amounted to only 2.7 per cent of tier one capital, while for Swiss banks the ratio was only 2.0 per cent. And for US banks, the exposure was lower still, accounting for less than less than 1 per cent of their tier one capital. The problem is that while some of the French and German banks have robust balance sheets, other financial institutions clearly lack the capital buffer to absorb the hefty losses that are likely to eventuate as the PIGS adopt punishing austerity programs that slash government spending and boost taxes. The risk is that by refusing to release the stress tests, the French and German governments will allow the problems in their banking sectors to fester. Instead of forcing troubled banks to either raise additional capital, or be taken over by stronger financial institutions, they’ll be allowed to continue in existence, but with so little capital that they’ll be unable to make new loans, or to write-down the losses on their existing portfolios. Ultimately, these 'zombie' banks could pose as great a risk to the eurozone’s stability as the massive deficits that the PIGS have managed to accumulate.