European banks too big to fail start to fail...

[andyandy]

Potentially an even bigger threat to the global economy is the failure of European banks. With the imminent nationalisation of Hypo Real Estate in Germany, following on from Fortis in Belgium/Holland, and similar moves under way in Ireland and Iceland, we are now entering a situation where countries are taking on liabilities equivalent or greater than their GDP. Germany has now moved to guarantee all bank deposits along with Ireland, and the BBC is predicting that Britain will have to follow. The problem in Europe is the amount of cross-border exposure, the inflexibility of the central bank to deal with specific country problems, and the difficulties in agreeing how liabilities should be shared. So, will it be in Europe where we see the greatest fallout from the credit crisis? What happens when banks too big to fail start to fail and the liabilities are too big for countries to shoulder?

[Blackadder]

The idea is that these liabilities are never too big for national governments to shoulder.

in fact many believe mr Bos, the Dutch treasurer got a good deal, and will be able to sell the bank again at profit in a few years.

[ServiceSoon]

Potentially an even bigger threat to the global economy is the failure of European banks.Why do you say that?

With the imminent nationalisation of Hypo Real Estate in Germany, following on from Fortis in Belgium/Holland, and similar moves under way in Ireland and Iceland, we are now entering a situation where countries are taking on liabilities equivalent or greater than their GDP.Excellent question. Oliver started a thread about how public debt affects the economy. I encourage you to join. After the Oliver bashing concludes it should be a great thread.

I have read about the crisis you speak of in the news, but with little details. Can you please explain the cause of the Hypo Real Estate AG crisis?

Germany has now moved to guarantee all bank deposits along with Ireland, and the BBC is predicting that Britain will have to follow. The problem in Europe is the amount of cross-border exposure, the inflexibility of the central bank to deal with specific country problems, and the difficulties in agreeing how liabilities should be shared. So, will it be in Europe where we see the greatest fallout from the credit crisis? What happens when banks too big to fail start to fail and the liabilities are too big for countries to shoulder?Can't all the nations just come together and vote? That would be democracy at work. Every member of the EU has a voice.

[andyandy]

Why do you say that?

because a systemic banking crisis could lead to the disintegration of the European monetary union. The joint currency has enjoyed a decade of benign market conditions, but has never been tested in any kind of crisis. And if the eurozonestarts to see some of the huge cross-border banks failing, no one really knows who is supposed to pick up the tab. A microcosm of the difficulties can be seen in the German announcement yesterday that they were going to guarantee all retail deposits, something which has a profound effect on European banking, but something which was announced unilaterally in national interest rather than EU interest. If we enter a significant depression, then a centralised monetary policy could stoke tremendous national resentment, as some countries have to endure policies not in their own country's interest, for the greater European good. Will Italian politicians be happy to sacrifice the Italian economy to help the Spanish? It seems unlikely. The trouble is that the EU has never been really stress tested, and we are about to find out what happens when it is.



I have read about the crisis you speak of in the news, but with little details. Can you please explain the cause of the Hypo Real Estate AG crisis?

From reports, they acquired an Irish financial company right at the start of the credit crunch, which has significant exposure to bad debts. They were looking to refinance some of the liabilities, but were unable to due to the decline in lending conditions.

The worrying thing is it was only last week that various Europeans were still describing this as a fundamentally Anglo-Saxon finance problem. A few days later banks across Europe are in difficulties. The level of uncertainty for the future is amazing. Iceland could be moving close to country default, with the nationalisation of the entire banking sector, and huge liabilities due to over leveraging in the finance sector. But at least they are not in single currency, or an especially large economy, who knows what would happen if they were.

It brings to mind the old Chinese curse:

"May you live in interesting times."

:)

[Blackadder]

I always wondered how the icelanders became so rich. After all they just live on a vulcanic rock with some fish. Maybe this is the answer. :)

Hmm.. I was jesting.... I thought... maybe not...

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3131573/Financial-Crisis-hit-Iceland-draws-up-banking-rescue-plan.html

Financial crisis hits Iceland (http://www.google.nl/search?q=financial+crisis+hits+iceland&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:nl:official&client=firefox-a)

[dann]

The Icelandic success story (http://www.sjwaterfront.com/saint_john_waterfront_development_newsroom/2007_10_19_City_has_big_advantage_over_Icelandic_s uccess_story_guru.htm) a few months later … (http://archives.tcm.ie/businesspost/2008/03/30/story31585.asp)

Honorable business (http://ruthlesscriticism.com/honorablebusiness.htm).

[SezMe]

Good thread, andyandy. Maybe you can help with a question. While it is not a resolved issue, most here in the USA think that deregulation of the financial markets was a major component of the American problem. So is the problem in the EU because they bought a lot of crappy American financial instruments so we're dragging the EU down or did the EU engage in similar deregulation so that the EU problem is home grown?

[Corsair 115]

Can't all the nations just come together and vote? That would be democracy at work. Every member of the EU has a voice.In terms of a European bailout package similar to that recently passed in the U.S., from the news reports I've seen, the problem in the EU is that, while there is a single currency, the banking rules and regulations were never harmonized between the EU member states. This makes it harder to have a pan-EU plan since the individual nations have different regulatory situations.

[egslim]

So is the problem in the EU because they bought a lot of crappy American financial instruments so we're dragging the EU down or did the EU engage in similar deregulation so that the EU problem is home grown?
The problem with Fortis was they had just taken over (part of) another big bank (ABN Amro), and needed to borrow to finance that. Since the credit markets are currently locked down, Fortis no longer could. When customers lost confidence in the bank because of that and began to leave, they were finished.

As far as I know Fortis has only minor exposure to crappy American financial instruments.

[egslim]

In terms of a European bailout package similar to that recently passed in the U.S., from the news reports I've seen, the problem in the EU is that, while there is a single currency, the banking rules and regulations were never harmonized between the EU member states. This makes it harder to have a pan-EU plan since the individual nations have different regulatory situations.
While that is true, from what I understand a US-style bailout package would do little good here. Most European banks seem to have only limited exposure to US mortgage backed securities. But a number of them depend on functioning credit markets for their daily activities, so they're in trouble anyway.

On the upside, EU member states now plan to synchronize savings guarantees. The exact amount is to be determined today, it will be somewhere between € 40,000 and € 100,000. Source (in Dutch): http://www.volkskrant.nl/economie/article1074906.ece/EU_komt_met_een_garantie_spaarders

I expect this crisis to lead to further harmonization between European countries too.

[dorisbonkers]

Most European banks seem to have only limited exposure to US mortgage backed securities.

Hello. I'm pretty new here, a financial reporter, ex investment bank trader.
Here's a list from end of September listing European banks' exposure to subprime.

The biggest by far is UBS. made 37 billion dollars of writedowns so far on subprime this year and last.

SocGen - roughly 100 million euros

Zurich Financial 340 million dollars in subprime and 479 million collateralised debt obligations

Citibank Plc funds (part of Citi) have about 332 million dollar exposure

Credit Agricole - about 586 million euros

Standard Chartered fund Whistlejacket has about 250 mln dollars

Europe, compared with Asia, is very heavily exposed to subprime.

[plumjam]

If I, as a taxpayer, end up paying for these banks, am I allowed to send each of them a letter and charge them 25 pounds for notifying them that they're overdrawn with Plumjam Consolidated Investments without authorisation?

[egslim]

SocGen - roughly 100 million euros
Revenue ▼ € 21.923 billion (2007)
Net income ▼ € 1.604 billion (2007)
http://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale

€ 100 million sounds a lot, but compared with a net income of € 1,604 million it's peanuts. One year with slightly lower profits, and that's it.

Credit Agricole - about 586 million euros
Revenue €31.04 billion (2007)
Profit ▲ €4.556 billion (2007)
http://en.wikipedia.org/wiki/Credit_Agricole

Standard Chartered fund Whistlejacket has about 250 mln dollars
Revenue $11.067 billion (2007)
Operating income $4.035 billion (2007)
http://en.wikipedia.org/wiki/Standard_Chartered_Bank

I haven't bothered to look up the others, but the point is that while a couple of hundred million sounds a lot, it's minor compared to annual profits of several billions.

The biggest by far is UBS. made 37 billion dollars of writedowns so far on subprime this year and last.
And that is indeed a serious writedown, but it seems to be the only serious one in your post.

[andyandy]

There is a nifty chart in the financial Times, showing bank assets to the country's GDP, Tier 1 ratios, levels of country household indebtedness.

http://www.ft.com/cms/s/0/61d7e148-8f15-11dd-946c-0000779fd18c,dwp_uuid=11f94e6e-7e94-11dd-b1af-000077b07658.html

[geni]

In terms of a European bailout package similar to that recently passed in the U.S., from the news reports I've seen, the problem in the EU is that, while there is a single currency, the banking rules and regulations were never harmonized between the EU member states. This makes it harder to have a pan-EU plan since the individual nations have different regulatory situations.

That would be less of a problem is the individual countries were the size of say France. When they are the size of belgium they are more of an issue.

[dudalb]

I understand the attempts to get all the European Union members to agree to a common plan failed .
Maybe in a few years Euros will be collector's times....

[egslim]

I understand the attempts to get all the European Union members to agree to a common plan failed .
Maybe in a few years Euros will be collector's times....
Dropping the Euro in a situation like this would amount to financial and economic suicide for any of its members. Nobody in charge is that stupid, which means the only alternative is closer cooperation.

As for the common plan, what do you propose? There are strong arguments against a US-style bailout of toxic assets. It has been decided to temporarily raise the depositor's guarantees to at least € 50,000 and up to € 100,000 for a year. And that no systemic financial institution will be allowed to fail. Banking regulations and oversight are to be improved.

Interestingly, during the second quarter of this year Dutch banks lent 13% more money to corporations than a year before: http://www.lening-geld-lenen.nl/financieel-nieuws/ondernemers-lening-banken (in Dutch)

[ServiceSoon]

Hello. I'm pretty new here, a financial reporter, ex investment bank trader.
Here's a list from end of September listing European banks' exposure to subprime.

The biggest by far is UBS. made 37 billion dollars of writedowns so far on subprime this year and last.

SocGen - roughly 100 million euros

Zurich Financial 340 million dollars in subprime and 479 million collateralised debt obligations

Citibank Plc funds (part of Citi) have about 332 million dollar exposure

Credit Agricole - about 586 million euros

Standard Chartered fund Whistlejacket has about 250 mln dollars

Europe, compared with Asia, is very heavily exposed to subprime.Do you know if the banks suffering from subprime defaults were compelled to make these loans or if the banks made them on their own merit?