Monday, February 20, 2012

Basel III, European and American banks

As a Canadian living in Canada, where the Bank of Canada continues to warn of extremely dangerous financial times ahead, I watch in amazement the action of American and European banks -- maybe they know something we don't in Canada, but it remains that these institutions are trading as if Basel III was not going to happen -- ever.  Entering into trades that will soon be prohibitively expensive (because of capital requirements).

This was gleaned not through some great market insight on my part, rather a discussion today with some three "old bankers" who've worked the entire planet -- as bankers (you know, a few years in NY, Tokyo, London and maybe even some stranger outpost such as Shanghai...).  Bottom line these guys were telling me at lunch today (they now all work for Canadian banks) that they are observing what's going on in the market and are surprised!  First off, because all of Canada's banks effectively operate following Basel III rules, the loose lots of international business, to their American and European rivals.

First off, their bosses don't care if they loose the business, virtually every Canadian banks has assumed a horrible 2012 in terms of earnings, but (and this is important) they don't really care because more important than making money in 2012, is not loosing money in 2012.  Ask your friendly Canadian banker  if he will willingly extend any credit to an American or European bank; the answer is NO!  For the past 3 years Canadian banks have been cleaning up books, transferring their ISDA contract jurisdiction from NY to London (important for ownership of collateral).  Few counterparts really object, since their credit quality is much worse than that of Canadian banks.

Still, there is a massive worry in Canadian banks (and at the Bank of Canada) that things could unravel, today (Feb 20th) is a "decision day" for Greece -- we presume that cash will be lent another Euro 130 billion down the hole and in a few days (March 5th) private creditors have to agree to their 50% haircut -- otherwise it will be forced down onto them.  The assumption that this will all end well is presumptuous.


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