Thursday, February 4, 2016

European banks are not in good shape

So a few months ago, bad vibes started coming out of Italy; the banking sector was on edge, the Italian government has "decided" that it would create a Bad bank in which all the troubled loans, held by Italian banks, will be parked and eventually liquidated -- one small problem, the Italian government doesn't have the cash at hand to capitalise the bad bank...

Stories (and they are just that) that the new bad banks -- so that it doesn't break the new EU rules on bail-outs, would only capture 40% of the bad loans.  This new deal has been in serious discussion (with real details) and the impact is that Italian banks share have resumed their general decline (as can be seen below) [Startfort]

So that's Italy!  What about the rest?  Well DB came out a few days ago with truly mind blowing bad numbers:  7 billion , revenues are down -- in IB which is serious because IB and asset management are the two key core activities of the bank.  Turns out that yesterday total derivative exposure (gross) was also rather impressive with nearly $64 trillion (something in the order of 20x Europe GDP).  All along we though the bad guy was JP Morgan.  Then the other shoe dropped this morning, UBS just announces some massive losses too -- for a bank in the middle of a re-org, the news could not have been worse.

So some of the heaviest hitters in the European banking industry are having a truly horrible time, the implication for the European global economy cannot be good, for although I don't have much respect for the modern banking sector -- 2008 should have been a cleansing of the financial market -- the opposite occurred "Too big to fail, insured that the players could do anything.  They knew they would always escape prosecution.  Still it remains that the world is interconnected and when a firm like DB is in trouble, all bets are off. 

It doesn't take a genius to wonder what is going on.  I've seen North American bank numbers and the stories are far from being horrible.  Income from IB is up, capital market too -- and 2016 should be a great year with higher volatility.  Bond desks are not having fun, but still yields keep on dropping, so the trades are still interesting.  So its seems that NA banks are doing fine (granted the E&P sector could cause some serious headaches -- now if DB is in real trouble the risk of contagion is high -- as one punter said, Gross exposure is only a problem whey one of your counterparty fails (e.g. AIG) otherwise net exposure is a reliable risk barometer...which is crock! 

My gut instinct is that there is something up in the European banking sector.  The problems are very serious and will impact the "real economy" sooner than later.  Not sure how it will change things in NA, but it remains that troubled times are at hand.


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