Perilous
Times
Europe's banks are staring into the abyss
By Jeremy Warner Economics Last updated: September 13th, 2011
The Telegraph UK
Where now for European banks? Sir Howard Davies, former chairman
of Britain's Financial Services Authority, said on BBC Radio's
Today programme on Tuesday morning that he thought the French
government was only days away from having to recapitalise the
country's banking system for a second time. It's hard to disagree.
The panic seems to have been temporarily stemmed by a statement
from BNP Paribas to the effect that it wasn't having the problems
widely reported of finding dollar funding. There was also an
emphatic denial of discussions over state intervention. But no-one
is kidding themselves. Italy had to pay the highest spread since
joining the euro to sell its bonds on Tuesday. There are growing
fears over whether Europe's largest borrower can stay the course.
The eurozone sovereign debt crisis is meanwhile exacting a
devastating toll on the European banking system as a whole, the UK
included. With their high exposure to eurozone debt, the problem
is particularly acute for the French banking goliaths, BNP Paribas
and Societe Generale.
BNP alone has a eurozone sovereign debt exposure of some €75bn,
amounting to roughly 6pc of total assets, including €14bn of Greek
debt and €21bn of Italian government bonds. And that's just BNP.
The other two major French banks, SocGen and Credit Agricole each
have exposures of a similar order of magnitude. Collectively,
French banks have €56bn of Greek sovereign bonds alone. They've so
far only written down this Greek debt by around 20pc, or in line
with the restructuring agreed at the time of the last bailout.
That's nowhere near mark to market. In the increasingly likely
event of Germany kicking the Greeks out of the eurozone
altogether, Greek debt will become close to worthless. Greece is
already effectively a cash only economy. Most forms of credit has
effectively dried up, the Greek banking system is finished, and
capital controls to prevent what little money that remains from
leaving the country are surely only a matter of time. European
banking must prepare for the worst as far as Greece is concerned.
As for the remainder of the eurozone sovereign exposure, there's
been no write down at all among banks on these bonds. If there's a
wider problem of default, the bad debt recognition has yet to
come.
How come European banks have got so much of the stuff? Well
ironically, this is one lending decision gone wrong that the banks
cannot be blamed for. In response to the original banking crisis,
regulators ordered banks substantially to increase their liquidity
buffers. Government bonds are generally viewed as the most liquid
and least risky assets to hold, so that's where the money went.
That these regulatory obligations also helped governments fund
their ever growing deficits is by the by. In any case, nowhere is
the law of unintended consequences more in evidence than in
financial regulation. By seeking to address the last crisis with
greater liquidity buffers, regulators succeeded only in sowing the
seeds for the next one. A banking crisis that transmogrified into
a sovereign debt crisis now shows every sign of transmogrifying
back into another banking crisis.
Much of the selling pressure on European banks has come from the
US. American investors and lenders look at Europe and see a
Continent apparently incapable of gripping its problems. With the
debt crisis approaching some kind of self evident denouement,
there's no-one in charge, only denial and blame. Policymakers seem
more concerned with the irrelevancies of moral hazard than on
finding solutions. If it wasn't so tragic, it would be laughable.
Europe is fiddling while Rome burns.
When the banking crisis first broke, Europeans tended to regard it
as wholly an Anglo-Saxon problem. There was some recapitalisation
of French and German banks that went on in late 2008, early 2009,
but it wasn't nearly as big as in the UK and the US, and within a
year, the French banks had in any case largely repaid all their
state support. Problem over, it was thought.
The same refusal to face up to underlying solvency concerns
continues to dominate Contintental attitudes to the crisis. There
is a collective sense of denial. BNP for one insists that it is in
nothing like the same poor shape as many UK and US banks back in
2008. Profits are still buoyant, delinquency subdued, and capital
more than adequate, BNP insists. Unfortunately, that's not what
the markets are saying.
Record quantities of European term funding are set to mature in
the first quarter of next year. It's not clear that the European
Central Bank can cope with the sort of liquidity support that
banks will require if markets refuse to refinance it. Europe's
financial and monetary system is falling apart.
Since French banks are widely thought of as essentially arms of
the French state, is there actually any point in recapitalising
them? In France, the public subsidy issue which has so exercised
the Vickers Commission on banking in the UK is taken for granted.
Banks are understood to be underwritten by the state, and
therefore require less capital and can hand the benefits of
cheaper funding onto to their customers. Why not then just make
this implicit support explicit?
You only need to take one look at what happened to Ireland to see
why. In the early days of the crisis, the Irish government
promised to stand behind all banking liabilities. By doing so, it
ended up pushing the entire country into bankruptcy. No. France
and Germany need to recapitalise their banks. The sooner they do
so, the sooner the wider programme of debt forgiveness necessary
to set the European economy back on a sustainable footing can
begin.