Wednesday, September 28, 2016

Credit Swiss statement on European banks -- That's very serious!

I started writing about the US presidential debate this morning, 48 hours after the event to be able to have some clear thinking:  Its easy, Clinton won, she was prepared and Trump showed us that he remains the "winging kind of guy"  but he did not confirm the reason for not giving his tax returns -- he doesn't pay federal income taxes.

What is much more serious is what's going down in Europe with the banks.  Slightly over a year ago Tidjan Tiam became the CEO of Credit Swiss, a good-ish financial institution that actually has enough capital.  His statement:
“You get extreme movements on the basis of relatively minor piece of news because there’s a lot of uncertainty,” he said, citing “regulatory uncertainty” about future capital requirements and concerns about “potential fines like you’ve seen on Deutsche Bank this week”.
 “I think there is also a lot of doubt, a fundamental doubt, is there a viable business model that covers its cost of equity?” Mr Thiam added.
 “That’s the big big big question,” he said, describing it as something that “makes banks not really investable as a sector”. 
Deutsche Bank is an old institution, a great institution and I really wish them well, I hope that they come out of their current predicament”.
These are the statement that one of Europe's premier bank is making about DB in particular but also of the entire banking network.  His view is that Europe's banks are seriously undercapitalizes since they can hardly absorbe the hits from regulatory fines.  It also explains the sudden withdrawal of many new issues.  The woes of the European banking system yields are spreading and the issuers are not ready to absorbe the increased price (or they are rethinking their current pricing strategy).  Of course this was all at 5 am, by 1 pm, the markets were all up and the end of the world had once again been postponed. is however a real issue here;  rumors are that the several prime banks will be coming to the market for more capital, because although the business of CLO/CDO is pushing assets out of the door as fast as possible, the totals are not nearly substantial enough for them to meet their Basel III requirements.

I am guessing some long dated sub debt expensively priced that has an impact on the whole market spread, the whole market will be repriced; everyone prices their issues off the best risks and not the worse. There is a perception that German banks (including the Landesbank) have some serious undercapitalization issues  that need to be resolved ASAP-- they ALL thought they could ignore Basel III but it turns out that this may not be the case, as banks in the rest of the world have for the past 4 years been strengthening their balance sheet, and resent the Europeans trying to finess their way out of trouble.  BTW we are not even discussing Italy here -- its the core, its Germany and its France...

Anyway, its Wednesday and the world keeps on turning

Note:  No position on CS or DB

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