21/10/2013: Uneasy Links: Banks and Sovereign Bonds Exposures

IMF recently warned about growing own-sovereign exposures of European banks when it comes to government bonds holdings. FT echoed with an article: http://www.ft.com/intl/cms/s/0/9b6fb558-3270-11e3-b3a7-00144feab7de.html

Per FT:

• "...Government bonds accounted for more than a 10th of Italian banks’ total assets at the end of August, the last month for which data are available. That is up from 6.8 per cent at the beginning of 2012, according to data from the European Central Bank."
• "In Spain the proportion has risen to 9.5 per cent, up from 6.3 per cent over the same period…"
• "… in Portugal it has increased to 7.6 per cent from 4.6 per cent."

"By far the majority of the increases – which occurred steadily month-on-month – are in holdings of bonds issued by banks’ own governments." So overall, "Government bonds, as a percentage of total eurozone bank assets, have grown to 5.6 per cent from 4.3 per cent since the beginning of 2012."

Lest we forget, there is a strong momentum building up in Europe to do something about the problem of European banks over-reliance on sovereign bonds - a momentum driven by lower debt countries with significant exposures to Target 2 imbalances. At the end of September, ECB's Governing Council Member Jen Weidmeann said that "The time is ripe to address the regulatory treatment of sovereign exposures," Weidmann wrote in an opinion piece published on the website of the Financial Times. "Without it, I see no reliable way of breaking the sovereign-banking nexus." (see here: http://www.efxnews.com/story/20978/ecb-weidmann-time-end-preferential-treatment-gov-debt?utm_content=bufferffb97&utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer)

Basically, removing automatic zero risk weighting on sovereign bonds, especially for the weaker peripheral sovereigns will be a major problem for the European banks and can precipitate a strong sell-off of the sovereign bonds. I suspect it will be unlikely to take place in the current environment. But gradual shift toward such an approach can easily take place.

Another recent article highlighted the shift away from foreign lending by European banks on foot of the growing sovereign debt exposures: http://www.voxeu.org/article/impact-sovereign-debt-exposure-bank-lending-evidence-european-debt-crisis

Based on Forbes data,

• BNP Paribas has total assets of USD2,668 billion, with USD43.1 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.62% of total assets);
• Deutsche Bank has total assets of USD2,545 billion, with USD16.2 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
• HSBC has total assets of USD2,468 billion, with USD6.7 billion in peripheral (ex-Cyprus) Government bonds (0.27% of total assets);
• Barclays has total assets of USD2,328 billion, with USD29.2 billion in peripheral 'light' (ex-Cyprus) Government bonds (1.26% of total assets);
• RBS has total assets of USD2,266 billion, with USD3.5 billion in peripheral (ex-Cyprus) Government bonds (0.15% of total assets);
• Credit Agricole has total assets of USD2,131 billion, with USD19.1 billion in peripheral (ex-Cyprus) Government bonds (0.89% of total assets);
• Banco Santander has total assets of USD1,610 billion, with USD69.6 billion in peripheral (ex-Cyprus) Government bonds (4.32% of total assets);
• Lloyds has total assets of USD1,546 billion, with USD0.1 billion in peripheral (ex-Cyprus) Government bonds (0.01% of total assets);
• Societe Generale has total assets of USD1,512 billion, with USD9.7 billion in peripheral (ex-Cyprus) Government bonds (0.64% of total assets);
• Unicredit has total assets of USD1,232 billion, with USD54.3 billion in peripheral (ex-Cyprus) Government bonds (4.41% of total assets)

Two charts highlighting the plight of Spanish and Italian banks in terms of their sovereign bonds exposures (first) and the levels of LTROs exposures:

10/10/2013: IMF's GFSR October 2013: More Focus on Banks

Now, back to GFSR and banks. I covered some of the IMF findings on banks here: http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus_10.html

This time, let's take a look at what IMF unearthed on funding side of the banking systems. Fasten your seat belts, euro area folks…

Euro area banks have shallower deposits base than US banks… but, wait… euro area banks are supposedly 'universal' model, so supposed to have MORE deposits, than the originate and distribute model of the US banks… Oops… Euro area banks like holding banks deposits - just so contagion gets a bit more contagious. Euro area banks hold tiny proportion of equity, lower than that of the US banks.

By all means, this is a picture of weaker euro area banks than US banks - something I noted here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

Another chart, more bumpy road for euro area:

Per above, there is a massive problem on funding side for euro area banks in the form of huge reliance on debt (both secured and unsecured). The US banks are much less reliant on secured debt (they can issue real paper and raise securitised funding) and they rely less overall on borrowing.

Chart below shows the structure of secured bank debt. Euro area again stand out with huge reliance on covered bonds. US stands out in terms of its continued reliance on MBS. The crisis focal point of the latter did not go away… and the crisis focal source of contagion - banks debt funding - has not gone from euro area's 'reformed' banks.

Happy times... Mr Draghi today expressed his conviction that euro area banks have been cured from their ills... right... hopium-783 is the toast of Frankfurt.

10/10/2013: IMF's GFSR October 2013: Focus on Banks

As promised in the earlier post, focusing on Corporate Debt Overhang (http://trueeconomics.blogspot.ie/2013/10/10102013-imfs-gfsr-october-2013-focus.html), I am covering in a series of posts the latest IMF GFSR.

Let's take a look at the banking sector focus within the GFSR:

Note the relatively healthy position of the euro area banks on the basis of Tier 1 capital ratios. However, when it comes to leverage, the chart below shows a ratio of tangible equity to tangible assets (the so-called Tangible Leverage ratio). The higher the number in the first chart above, the lower is the capital ratio ('bad thing'), the higher the number is in the chart below, the higher is the ratio of equity to assets ('good thing'):

So euro area banks are doing fine by Tier 1 capital, but are not fine by leverage... As the rest of the IMF analysis highlights, much of this aberrational result arises from the nature of the euro area banking model (assets-heavy 'universal banking' model), plus, as IMF politely puts:

"The conflicting signals also highlight the  importance of restoring investor confidence in the accuracy and consistency of bank risk weights. This also suggests that risk-weighted capital ratios should be supplemented by leverage ratios, as proposed in the Basel III framework."

No comment on the above...

GFSR is deadly on profitability of banks and equity valuations. Here's the key chart:

Notice the concentration of euro area banks at the bottom of the distribution. Still think Irish banks shares held by the Exchequer are worth EUR11 billion?.. really?.. By the chart above, they should be valued at around 2-3% of their tangible assets... which would be what? Close to EUR6 billion, maybe EUR9 billion. Which refers to all Irish banks. Listed, unlisted, foreign, domestic... And to all their equity... not just the equity held by the Exchequer.

Never mind. Like Irish banks, euro area banks are going to continue dumping assets... err... deleverage...

"European banks have been deleveraging in response to market and regulatory concerns about capital levels, and may continue to do so. ...a combination of market and regulatory
concerns about bank capitalization has already led to an increase in capital levels at EU banks. …Over the period 2011:Q3–2013:Q2, large EU banks reduced their assets by a total of $2.5 trillion on a gross basis — which includes only those banks that cut back assets — and by $2.1 trillion on a net basis."

So you thought it was surprising/unusual/unexpected that the banks are not lending? Every policymaker harping on about banks credit 'growth' should have known this deleveraging is ongoing and with it, no new credit growth will occur… I mean USD2.5 trillion!

"…About 40 percent of the reduction by the banks in the EU as a whole was through a cutback in loans, with the remainder through scaling back noncore exposures and sales of some parts of their businesses… As discussed in the April 2013 GFSR, banks have been concentrating on derisking their balance sheets by reducing capital-intensive businesses, holding greater proportions of assets with lower risk weights (such as government bonds), and optimizing risk-weight models."

Put differently, to beef up capital ratios, the banks shed primarily riskier loans. Now what these might be? Oh, yes, SMEs and non-financial corporate loans in general… So that 'credit growth' to SMEs?..

"The capital ratio projection exercise previously discussed suggests that some banks will need to continue raising equity or cutting back balance sheets as they endeavor to repair and strengthen their balance sheets."

Read my lips: no new credit growth… QED…

You can read the entire GFSR here: http://www.imf.org/External/Pubs/FT/GFSR/2013/02/pdf/text.pdf

Note: my recent article on European banks is here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

10/10/2013: IMF's GFSR October 2013: Focus on Corporate Debt Overhang

I'll be blogging out today some interesting charts from the IMF's GFSR October 2013... these will appear in no particular order, with brief summaries...

Here's a start: non-financial corporate sector debt crises in the euro periphery. I always noted that the important issue in the current crisis is not just a traditional sovereign debt crunch, but the debt overhang over what I call the total real economic debt: household, non-financial corporate and government debts.

In the above that Irish banks offer lower rates, based on the bank capital and reserves ratio to NPLs than other banks, including Portugal, Italy and Spain. Also note that 5 years into the crisis and after massive recapitalisations Irish banks buffers are lower than for any other economy, save Cyprus and Greece. That is the cost of delaying resolution of the loans.

Note: my latest article on European and Irish banking systems is available here: http://trueeconomics.blogspot.ie/2013/10/9102013-leveraged-and-sick-euro-area.html

The next four charts show that quality of loans to non-financial corporate sector is deteriorating and remaining poor for firms in the periphery, while improving for German and French firms.

Most worrying is the Italian situation where quality of loans is continuing to deteriorate and the rate of deterioration is accelerating, while Spanish situation remains exceptionally weak:

Things are desperate-to-dire in Greece and Portugal too:

More to come, so stay tuned...

9/10/2013: Leveraged and Sick: Euro Area Banks - Sunday Times October 6

This is an unedited version of my Sunday Times column from October 6, 2013.


Newton’s Third Law of Motion postulates that to every action, there is always an equal and opposite reaction. Alas, as recent economic history suggests, physics laws do not apply to economics.

The events of September are case in point. In recent weeks, economic data from the euro area and Ireland have been signaling some improvement in growth conditions. Physics would suggest that the reaction should be to use this time to put forward new systems that can help us averting or mitigating the next crises and deal with the current one. Political economy, in contrast, tells us that any improvement is just a signal to policymakers to slip back into the comfort of status quo.

Meanwhile, the core problems of the Financial Crisis and the Great Recession remain unaddressed, and risks in the global financial markets, are rising, not falling.

More ominously, the Euro area, and by corollary Ireland, are now once again in the line of fire. The reason for this is that for all the talk about drastic changes in the way the financial services operate and are regulated, Europe has done virtually nothing to effectively address the lessons learned since September 2008.


Last month we marked the fifth anniversaries of the Lehman Brothers’ bankruptcy and the introduction of the Irish banking guarantee. These events define the breaking points of the global financial crisis. In the same month we also saw the restart of the Greek debt negotiations ahead of the Third Bailout, the Portuguese Government announcement that its debt will reach 128 percent of the country GDP by the end of this year, a renewed political crisis in Italy, and continued catastrophic decline in the Cypriot economy. Public debt levels across the entire euro periphery are still rising; economies continue to shrink or stagnate. Financial system remains dysfunctional and loaded with risks. Voters are growing weary of this mess. In Spain, political divisions and separatist movements gained strength, while German and Austrian elections have signaled a prospect of the governments’ paralysis.

In Ireland, the poster boy for EU policies, pressures continued to build up in the banking system. The Central Bank is barely containing its dissatisfaction with the lack of progress achieved by the banks in dealing with arrears and is forcefully pushing through new, ever more ambitious, mortgages resolutions targets. Yet it is not empowered to enforce these targets and has no capacity to steer the banks in the direction of safeguarding consumer interests. Business loans continue to meltdown hidden in the accounts.

Meanwhile, the latest set of data from the banking sector is highlighting the fact that little has changed on the ground in five years of the crisis. Domestic deposits are flat or declining – depending on which part of the system one looks at. Foreign deposits are falling. Credit supply continues to shrink.


Perhaps the greatest problem faced by the euro area and Ireland is that since the late 2008, tens of thousands of pages of new regulations have been drawn up in attempting to cover up the collapse of the banking system. Well in excess of EUR 700 billion was spent on ‘repairing’ the banks. And yet, few tangible changes on the ground have taken place. The lessons of the crisis have not been learned and its legacy continues to persist.

There are three basic problems with euro area financial systems as they stand today - the very same problems that plagued the system since the start of the crisis. These are: high leverage and systemic risks, excessive concentration of the banks by size, and wrong-headed regulatory responses to the crisis.

European banks are still leveraged far above safety levels. Lehman Brothers borrowed 31 times its own capital in mid-2008. Today, euro area banks borrow even more. No new European rules on leverage have been written, let alone implemented.

New York University’s Volatility Lab maintains a current database on systemic risks present in the global banking sector. Top 50, ranked by the degree of leverage carried on their balance sheet, euro area banks had combined exposure to USD 1.376 trillion in systemic risks at the end of last week. The banks market value was half of that at USD668 billion. Average leverage in the euro area top 50 banks is 58.5 or almost double Lehman's, when measured as a function of own equity. Two flagship Irish banks, still rated internationally, Bank of Ireland and Ptsb, are ranked 37th and 46th in terms of overall leverage risks and carry combined systemic risk of USD11.4 billion. Accounting for the banks provisions for bad loans, the two would rank in top 20 most risky banks in the advanced world.

Compare this to the US banking system. The highest level of leverage recorded for any American bank is 20.4 times (to equity). Total systemic risk of the top 50 leveraged financial institutions in the entire Americas (North and South) is around USD489 billion, set against the market value of these institutions of USD1.4 trillion.

Since September 2008, systemic risk in the US banking system has more than halved. In the case of euro area, the decline is only one-fifth.

Euro area banks positions as too-big-to-fail are becoming even stronger as the result of the crisis. In the peripheral euro states, and especially in Ireland, this effect is magnified by the deliberate policies attempting to shore up their banking systems by further concentrating market power of ‘Pillar’ banks.


Another area in which change has been scarce is the regulations concerning the funding of the banks. The crisis was driven, in part, by the short-term nature of banks funding – the main cause for the issuance of the September 2008 banking guarantee in Ireland.

In the wake of the crisis, one would naturally expect the new regulatory changes to focus on increasing the deposits share in funding and on reducing banks’ reliance on and costly (in the case of restructuring) senior bonds. None of this has happened to-date and following Cypriot haircuts on depositors one can argue that the ability of euro area banks to raise funding via deposits has now been reduced, not increased.

In addition to driving consolidation of the sector, Europe’s political leaders promised to raise the capital requirements on the banks. Actions did not match their rhetoric. Higher capital holdings are not being put in place fast enough. The EU is actively attempting to delay global efforts at introduction of new minimum standards for capital. As the result, current levels of capital buffers held by the top 50 euro area banks are below those held by Lehman Brothers at the end of 2008. Irish banks capital levels, even after massive injections of 2011, are also lower than that of Lehman’s once the expected losses are accounted for.


Even more ominously, the ideology of harmonisation as a solution to every problem still dominates the EU thinking. This ideology directly contradicts core principles of risk management. By reducing diversity of the regulatory and supervisory systems, the EU is making a bet that its approach to regulation is the best that can ever be developed. History of the entire European Monetary Union existence tells us that this is unlikely to be the case.

Moving from diverse regulatory systems and competitive banking toward harmonised regulation and more concentrated financial sector dominated by the too-big-to-fail ‘Pillar’ institutions implies the need for ever-rising levels of rescue funds and capital buffers.

Currently, there are only two proposals as to how this demand for rescue funds can be addressed. You guessed it – both are utterly unrealistic when it comes to political economy’s reality.

The first one is promising to deliver a small rescue fund for future banks rescues capitalized out of a special banks levy. The fund is not going to be operative for at least ten years from its formation and will not be able to deal with the current crisis legacy debts.

The second plan was summarized this week in the IMF policy paper. Per IMF, full fiscal harmonisation is a necessary condition for existence of the common currency. A full fiscal union, and by corollary a political union as well, is required to absorb potential shocks from the future crises. The union should cover better oversight by the EU authorities over national budgets and fiscal policies, a centralised budget, borrowing and taxing authority, and a credible and independent fund for backstopping shocks to the banking sector. In more simple terms, the IMF is outlining a federal government for Europe, minus democratic controls and elections.

Under all of these plans, there is no promise of relief for Ireland on crisis-related banking debts. In fact, the IMF proposals clearly and explicitly state that the stand-alone fund will only be available to deal with future crises. Addressing legacy costs will require separate mutualisation of the Government liabilities relating to the banking sector rescues. The IMF proposal, in the case of Ireland, means accepting tax harmonisation and surrendering some of the Irish tax revenues to the federal authorities.


At this stage, it is painfully clear to any objective observer that fundamental drivers of the Financial Crisis triggered by the events of September 2008 remain unaddressed in the case of European banking. Thus, core risks contained in the financial system in Europe and in Ireland in particular are now rising once again. Politics have been trumping logic over the last five years just as they did in the years building up to the crisis. This is not a good prescription for the future.

Box-Out: 

A study by the Bank for International Settlements researchers, Stephen Cecchetti and Enisse Kharroubi, published this week, attempted to uncover the reasons for the negative relationship between the rate of growth in financial services and the rate of growth in innovation-related productivity. In other words, the study looked at what is known in economics as total factor productivity growth – growth in productivity attributable to skills, technology, as well as other 'softer' sources, such as, for example, entrepreneurship or changes in corporate strategies, etc. The authors found that an increase in financial sector activity leads to outflow of skilled workers away from entrepreneurial ventures and toward financial sector. This, in turn, results in the financial sector growth crowding out growth in R&D-intensive firms and industries. The study used data for 15 OECD countries, including some countries with open economies and significant shares of financial sector in GDP, similar to Ireland. The findings are striking: R&D intensive sectors located in a country whose financial system is growing rapidly grow between 1.9 and 2.9% a year slower low R&D intensity sectors located in a country whose financial system is growing slowly. This huge effect implies that for the economies like Ireland, shifting economic development to R&D-intensive activity will require significant efforts to mitigate the effects of the IFSC on draining the indigenous skills pool. It also implies that Ireland should consider running an entirely separate system for attracting skilled immigrants for specific sectors.

16/9/2013: Bigger Question than Answers: Euro Area Banks Funding

An interesting chart from Credit Suisse (h/t to Fabrizio Goria ‏@FGoria) on marginal funding costs of Euro area banks:

Four points to note:

1. Marginal funding costs are now in line (albeit with a bit of volatility) with the costs in 2004-2006 period. This should be good, right?.. But
2. Source of marginal funding is now exclusively CDS-backed as opposed to Euribor, and
3. Spread over the repo rate is still consistent with the 2008 and 2011 spikes and is not getting any better with recent rate cuts
4. LTROs helped, but their effect is no longer present and since late 2012 we are seemingly in a 'long-run' trend pattern or in an 'absent catalyst' base?

Question one is, if base rate creeps up, what will happen to funding costs? Question two is, if the US base creeps up, what will happen to euro area funding costs?

The latter is non-trivial: we've heard of the emerging markets rot on foot of 'tapering' talks...

19/7/2013: Spain's Bad Loans: Heading for the Eurotroit solution?

Spanish banks bad loans ratio of all assets for May 2013:

H/T: Ioan Smith @moved_average

The Eurotroit keeps rolling on... Notice how Spain has by now largely erased the reductions in bad loans driven by assets shifts to 'bad bank' Sareb (EUR50.45bn portfolio, with 76,000 empty housing units, 6,300 rented homes, 14,900 plots of land and 84,300 loans). Spanish bad loans as a percentage of total credit rose from10.5% in March to over 11.2% in May.

And they will continue rising.

That's because in Spain, ultimate level of bad loans is going to be closer to Ireland's, where over 50% of SME loans are non-performing, over 25.8% of all mortgages are non-performing or at risk of default, and as of June 2013, 24.8% of all loans were non-performing, against EuroTanic's average 7.5-7.6% (EUR920bn or so). Irish numbers exclude Nama.

So even with the sunshine and sea, Costa del Concrete is going to cost Spain over 20% in terms of bad loans ratio in the end.

20/6/2013: Stalled Irish Banks Reforms: Sunday Times, June 16, 2013

This is an unedited version of the Sunday Times article from June 16, 2013


The latest data from the Central Bank shows that in two years since the current government took office, Irish banking sector is not much closer to a return to health than in the first months of 2011.

Objectively, no one can claim that the task of reforming Irish banking sector is an easy one. However, credit and deposits dynamics in the sector point to the dysfunctional stasis still holding the banks hostage. Despite ever-shrinking competition and vast subsidies extended to them, Irish banks are not investing in new technologies, systems and models. Banks’ customers, including businesses and households, are thus being denied access to services and cost efficiencies available elsewhere. In short, the Government-supported model of Irish banking is failing both the sector and the economy at large.


In April this year, total inflation-adjusted credit advanced to the real domestic economy, as measured by loans to Irish households and non-financial corporations, stood at EUR175,419 million. Since Q1 2011, when the current Government came to power, real credit is down EUR32,302 million. This figure is equivalent to roughly twice the annual rate of gross investment in the economy in 2012. Total credit to non-financial corporations has now been in a continuous decline for 48 months.

Half of this contraction came from loans over 5 years in duration. These loans are more closely linked to newer vintage capital investment in the economy, generation of new jobs, R&D and innovation activities, as well as new exports, than loans with shorter duration. Let’s take this in a perspective. The fall in total longer duration lending since mid-2009 is equivalent to losing 70,000-90,000 direct jobs. Factoring in interest income plus employment-related taxes, the foregone credit activity has cost us close to the equivalent of the tax increases generated in Budgets 2012-2013.

It would be fallacious to attribute credit supply declines solely to the property related lending. Based on the new data reported this Thursday by the Central Bank, loans levels advanced to private enterprises have fallen, between Q1 2011 and Q1 2013 in all sub-sectors of the economy, with largest loans supply declines recorded in domestic, as opposed to exports-oriented, sub-sectors.  All loans are down 6%, while loans to companies excluding financial intermediation and property related sectors are down 5.8%.

However, on the SMEs lending side, some of the steepest loans declines came from the exports-focused enterprises, such as ICT sector, where credit has fallen 9.7% on Q1 2011, or in computer, electronic and optical products manufacturing where loans are down 6.5%. Even booming agriculture saw credit to SMEs falling 5.7% over the last two years, while credit for scientific research and development is down 13.3%.

The picture is, in general, more complex for the levels of credit outstanding in the SMEs sector. On the demand side, in Ireland and across the euro area, there has been a noticeable worsening in the quality of loans applications filed with the banks during the crisis. In a research paper based on the ECB SAFE enterprise level survey data for euro area SMEs, myself and several co-authors have identified the problem of selection biases in companies’ willingness to apply for credit. In simple terms, SMEs more desperate for funding due to deteriorating balancesheets are more likely to apply for credit today. In contrast, healthier firms are more likely to avoid applying for bank credit.

ECB data also shows that Ireland’s problem of discouraged borrowers is much worse, than the euro area average. For example, in Ireland, 21% of all SMEs that did not apply for credit stated that they did so for fear of rejection, almost 3 times the rate of the euro area average and nearly double the second worst performing economy – Greece.


On the funding side, Irish banks have been and remain the beneficiaries of an unprecedented level of funding support compared to their euro area counterparts.

A recent research paper from the Dutch think tank CPB, titled "The private value of too-big-to-fail guarantees" showed that through mid-2012, the pillar banks in Ireland have availed of the largest subsidy transfers from the sovereign and Eurosystem of all banking systems in Europe. Funding advantages, accorded to the largest Irish banks, alone amounted, back in June 2012, to more than double the share of the country GDP compared to Portugal, and more than seven times those in Spain and Italy.

Removal of the explicit Guarantees was supposed to serve as a major step in the right direction. Alas, Irish pillar banks continue to depend for some EUR39.5 billion worth of funding on Eurosystem.  The latest Fitch report on the pillar banks shows that this reliance is likely to persist as loan/deposit ratios remain relatively high. Latest figures put Bank of Ireland, AIB and PTSB loan/deposit ratios at around 120%, 130%, and over 200%, respectively.

And there are further issues with funding in the system. By mid-2014, AIB is required to raise EUR3.5 billion to redeem the preference shares held by the National Pension Reserve Fund. Bank of Ireland will have to find EUR1.8 billion for the same purposes. In both cases there are questions as to how these funds can be secured in the current markets without either further reducing money available for lending or tapping into taxpayers’ funds.


Subsidies to the ‘reformed’ Irish pillar banks go hand-in-had with the regulatory protectionism, which completes the picture of massive transfers of income from the productive economy to the zombified banking sector.

Since 2008, Irish financial services continue to experience ongoing process of consolidation and, underlying this, the reduction in overall competition. Data from the ECB shows that the number of financial institutions operating in the country has fallen in 2012 to the levels below those recorded in 2000-2008. Dramatic declines in the fortunes of the third and the first largest lenders – Anglo and AIB - should have led to a drop in the combined market share held by the top 5 banks. Instead, the market share of top 5 credit institutions rose over the years of the crisis.

To a large extent, this reflects exits of a number of foreign lenders from the market. However, unlike in the case of the US and the UK, there are no new challengers to the incumbent players in the Irish asset management, investment, corporate and merchant banking, and credit unions sector. Neither the regulators, nor the banks have any incentives to encourage new players' entry.

And this has direct adverse impact on the overall health of the economy. When we studied the effects of banking sector concentration on firms’ willingness to engage with lenders, we have found that higher concentration of big banks’ power in a market is associated with lower applications for credit and higher discouragement.

As the result of the reforms undertaken in the Irish banking sector, our banking services are left to stagnate in the technological and strategic no-man's land.

Mobile and on-line banking systems remain nothing more than appendages to the existent services, with only innovation happening in the banks attempting to force more customers to on-line banking to cut internal costs.

Currently, worldwide, banking services are migrating to systems that can facilitate lower cost customer-to-customer transactions, such as direct payments, e-payments, peer-to-peer lending, and mixed types of investment based on combinations of equity and debt. All of this aims to reduce cost of capital to companies willing to invest. Irish financial services still operate on the basis of high-cost traditional intermediation and the Government policy is to keep hiking these costs up. Instead of moving up to reflect the true levels of risks inherent in Irish banks, deposit rates for non-financial corporations and households are falling. Interest on new business loans for non-financial corporations is up 105 to 197 basis points in April 2013, depending on loan size, compared to the average rates charged in Q1 2011. Over the same time, ECB policy rates have fallen by 75 basis points. This widening interest margin is funding banks deleveraging at the expense of investment and jobs.


Combination of the lack of trust in the banking system, alongside the lack of access to direct payments platforms means that many businesses in Ireland are switching into cash-only transactions to reduce risk of non-payments and invoicing delays. Currency in circulation in Ireland is up 10.3% on Q1 2011 average, while termed deposits are down 6.3%.

With big Pillar Banks unable to lend and incapable of incentivizing deposits growth, we should be witnessing and supporting the emergence of cooperative and local lending institutions. None have materialized so far. If anything, the latest noises from the Central Bank suggest that the credit unions can potentially expect to take a greater beating on the loans than the banks will take on mortgages and credit cards.

All-in, Irish banking system is far from being on a road to recovery so often spotted in the speeches of our overly-optimistic politicians and bankers. The credit squeeze on small businesses and sole traders is likely to continue unabated, and with it, the rates of business loans arrears are bound to rise.

Box-out:
In this month’s survey of economists by the Blackrock Institute some 64% of the respondents stated they expected euro area economy to get e little stronger over the next 12 months and none expected the recovery to be strong. In contrast, 74% of respondents thought German economy will get better and 81% forecast the same for the UK. In the case of Ireland, however, only 57% of respondents expected Irish economy to become a little stronger in a year through June 2014 (down on 75% in May 2013 survey). None expected this recovery to be strong. Interestingly, 69% of respondents describe Irish economy's current conditions as being consistent with an early or mid-cycle expansion - both normally consistent with above-trend rapid growth as economy recovers from a traditional recession. Thus, the survey indicates that majority of economists potentially see longer-term prospects for the Irish economy in the light of slower trend growth rates. Back in 2004-2005, I suggested that the Irish economy will, eventually, slowdown to an average rate of growth comparable to that of a mature small euro area economy. This would imply an annual real GDP growth reduction from the 1990-2012 average of 4.9% recorded by Ireland, to, say, 1.8% clocked by Belgium. Not exactly a boom-town prospect and certainly not the velocity that is required to get us to the sustainable Government debt dynamics.

17/6/2013: Deutsche, AIB and Cypriot Banks: 3 links

Back in 2011, I wrote about the extreme leverage ratios in some of Europe's top banks: http://trueeconomics.blogspot.ie/2011/09/13092011-german-and-french-banks.html. Deutsche Bank was at the top of the list. Now, 19 moths later it seems others are catching up: http://www.reuters.com/article/2013/06/14/financial-regulation-deutsche-idUSL2N0EO1D220130614.

And while on topic of banks, let's check this one for the record: http://www.independent.ie/business/irish/aib-will-not-repay-35bn-cash-it-owes-to-the-state-29337833.html. I wrote about this in Sunday Times last weekend, in passim, but this is more comprehensive article.

Another link of worth on the topic of banks is Cyprus banks fiasco history from ZeroHedge: http://www.zerohedge.com/news/2013-06-17/guest-post-real-story-cyprus-debt-crisis-part-1

23/4/2013: Updating the cost of banking crisis data

Nice update from the ECB on the cumulated cost of the banking crisis in Europe, now available through 2012. The net effect, summing up all assumed sovereign liabilities relating to the crisis, including contingent liabilities, and subtracting asset values associated with these liabilities are shown (by country) in the chart below:

Note the special place of Ireland in the above.

For the euro area as a whole, net liabilities relating to the crisis back in 2007 stood at EUR 0.00 (EUR36.72 billion for EU27). By the end of 2012 these have risen to EUR 740.15 billion (EUR 734.23 billion for EU27).

Net revenue losses for Government arising from the banking sector rescues, per ECB are:

23/4/2013: Ignore Europe's Debt Crisis at Your Own Peril

In recent days it became quite 'normal' to bash 'austerity' and talk about debt overhang as the contrived issue with no grounding in reality. Aside from the arguments of those worked up about Reinhrat & Rogoff (2010) paper (ignoring all other research showing qualitatively, and even quantitatively similar results to theirs), there is a pesky little problem:

• Debt has physical manifestation (albeit an imperfect one) in the form of banks (lenders) balancesheets. 

As the result of this pesky problem, we can indeed gauge (again, an imperfect translation, but better than none) the effect of repairing these balancesheets on the supply of credit, thus on investment, and thus on real economic activity.

Here are 2012 IMF estimates of the effects of the euro area banks deleveraging on the real economy:

'Weak policies' in the above are what we currently pursuing - with monetary and fiscal policies mismatch. And the negative effect of the declines runs past 2017 in the case of the heavily-indebted peripheral states. Cumulated decline estimated, relative to baseline GDP forecasts, is almost 12% over 5 years. Which over 20 years (average duration of the debt crises episodes) runs closer to 0.7% of GDP loss per annum due to banks deleveraging, aka due to banks managing debt levels on their own balancesheets.

The above chart is based on banking sector lending alone, excluding effects from deleveraging by other investors and financial intermediaries, and excluding effects of non-EU banks deleveraging or effects of the non-EU banks exits from the euro area. With these in place, the adverse effects can probably reach beyond 1% mark.

22/4/2013: Who funds growth in Europe?..

There are charts and then there are Charts. One example of the latter is via IMF CR1371

The above shows a number of really interesting differences between the euro area and the US, as well as within euro area:

• Look at the share of overall funding accruing to the traditional (deposits) banks in the US (tiny) and the euro area (massive) - debt is the preferred form of funding for Europe
• Look at the share of equity in the US funding and in euro area, ex-Luxembourg - equity is not a preferred way for funding growth in Europe.
• Why the above matter? Simply put, debt - especially banks debt - is not challenging existent ownership of the firm raising funding. Which means that patriarchal structures of family-owned firms, with their inefficient and paternalistic hiring and promotions and management systems can be sustained more easily in the case of debt-funded firms than in the case of equity funded ones.
• Look at the role played in the US by the credit supplied by 'other financial institutions' - non-banks. Again, these would be more 'activist'-styled funding streams exerting more pressure on management and ownership structures.

What about Ireland? Look at the composition of funding sources in the country:

1. Strong reliance on corporate bonds markets is probably reflective of three factors: (a) concentrated loans issued during the building boom and related to construction, development & investment in land remain the legacy of the boom and rely on collateralized bonds issuance, (b) banks funding via collateralization, (c) concentrated nature of Irish listed plcs, (d) massive M&A spree undertaken by Irish plcs and larger private companies on foot of cheap leverage available in the 2000-2007 period, etc. The volume of bonds might be large, but their quality is most likely lower due to the above points.
2. Strong - actually second strongest in the sample after Cyprus - reliance on bank lending to fund economy.
3. Weak, extremely thin equity cushion. 

Now, keep in mind: equity is the best, most stable and most suitable for absorbing crisis impact form of funding.

17/4/2013: Global Banking Sector Roadkill Alley (aka euro area)

Lets play the game of 'Spot the odd one out...' 

Fact 1: Globally, growth is concentrating in Latin America, Asia Pacific and Africa (see earlier post here) and the lowest growth centre is the Euro area.

Fact 2 (via IMF GFSR Chapter 1):

Question: Which banking system has spent almost three years now 'deleveraging' itself out of global growth centres so it can focus its immensely healthy balancesheets on pursuing growth where there is no growth in sight?

Answer on a post-card addressed to:

Mr Mario Draghi 

Kaiserstrasse 29
60311 Frankfurt am Main, Germany

Bonus round: in the Sick Banks Club (aka euro area) which are the sickest and second sickest national banking systems?

For hint, see this post.

25/3/2013: Cyprus is unique in its problem... oh, wait...

So you'd think Cyprus is the 'bad boy' in grossly-overweight-financial-services club? Oh... right:

Source

Now, wait, I am sure the Department of Spin is going to come after me pointing that 'Ireland's figures include IFSC'... my reply... so what? Cypriot figures include Sberbank & VTB... and, unlike the-best-in-the-class Ireland, Cyprus is just starting to deleverage its financial services sector.

15/2/2013: Euro Area Banks: Staff & Admin Costs 2008-2011

Brilliant data set on Staff and Admin costs in domestic banking sectors across the Euro Area (H/T to Lorcan Roche Kelly aka @LorcanRK via twitter), via ECB (link) :

So run through these. Over 2008-2001, Admin & Staff costs in banks:

• Declined by 7.84% across the entire Euro Area;
• Went up in Cyprus by a massive 21.9% (banks are now bust), in Spain by 12.16% (banks are largely bust), in Portugal by +4.26% (many banks are zombified)
• Fell marginally by  -0.05% in Italy (some larger banks in pretty dire shape), -3.2% in Greece (banks are bust).
• Fell significantly in Ireland by -26.4% (banks are bust), Luxembourg by 36.5% (brassplates operations), and by 31.3% in shaken Estonia (banks are operating in high risk, low growth environment). Fell consistently in line with overall state of the crisis across the banks-related sectors of the economy in the Netherlands (-10.81%) and overshooting economy's woes in Belgium (-23.2%).
• Fell massively in Germany, where overall banking sector was not as badly mangled (-59.6%).

Go figure...

19/1/2013: Euro area banks need EUR400bn in capital: OECD

An interesting article via Euromoney (January 14, 2013) on European banks facing EUR400bn in capital shortfall estimated by the OECD.

A quote:

"A chief gripe is the extent to which European banks have refused to acknowledge their losses and write down bad loans, echoing the comedy of errors that has blighted Japan in recent decades.

... the European Banking Authority’s (EBA) financial stress test in June 2011 – which determined the capital-raising target for the regional banking system for 2012 – was based on an excessively benign treatment of the coverage ratio.

The median coverage ratio of the 90 European banks examined in the test was just 38% to meet the 9% core tier 1 capital ratio target. By contrast, the coverage ratio -  which indicates the amount of reserves banks have set aside relative to a pool of non-performing loans - for US banks equated to 67% in the first quarter of 2011, according to the Federal Deposit Insurance Corporation. ...

In a November report, before the Draghi ‘put’, Deluard noted: “In its mild form, European banks’ refusal to recognize losses could lead to a Japanese ‘lost decade’: banks evergreen their loans [ie, rolling over loans to borrowers who are unable to pay], regulators agree to play the ‘extend and pretend’ game, and the credit creation mechanism is permanently clogged."

And this week "the OECD, headed by Angel Gurria, added to the chorus of criticism – in contrast to the EBA’s upbeat assessments – by stating that the ratio of core tier 1 capital to unweighted assets of eurozone banks falls well short of 5% “in many cases”. On this benchmark, European banks face a €400 billion capital shortfall, or 4.5% of the eurozone’s GDP."

The OECD’s concern echoes that of the IMF, the Bank of England and the Basel Committee: "banks have inflated their asset values, despite the EBA’s self-congratulatory claim in July 2012 that banks in the region had reached a minimum 9% of the best quality core tier 1 capital to risk-weighted assets, in excess of the current international requirements."

And as OECD points out, the problem is much more than just 'peripheral' banks - the problem is Germany and France.

Here are two slides from my recent presentation on banking sector (I was planning to present more on this at the Irish Economy conference on February 1, but the session on banking got canceled, so will be posting the full slide deck here in few days time - stay tuned).

1/12/2012: Irish banking Reforms: are things getting better?

In the previous post, I discussed changes in irish banking system systemic stability in 2012 (January-November). But here's a longer range view - from September 2010 on through November 2012.

Now, keep in mind: since September 2010, Irish banks had

1. Massive recaps (2011-2012)
2. Full reform and deleveraging programmes, approved by the EU and Irish authorities
3. Rounds of increases in charges on customers to beef their own interest margins
4. Vast subsidies from the ECB and CBofI
5. Subsidies from the Government via deposits (see here)
6. According to the Government, BofI (largest bank) has completed its deleveraging programme, while AIB (second largest bank) is ahead of target
7. Massive sales of riskiest assets to Nama that crystalized losses and led to recaps, which are now completed
8. According to the Government have bee operating in more benign environment of property prices stabilization
9. Benefited from a 88% rally in Government bonds which they stuffed onto their balancesheet over 2010-present like there is no tomorrow

and so on. In other words, there are tomes and tomes of Government sponsored propaganda to suggest that things are going honky-dory in the banking sector in Ireland. Here's what Head of the Department of Finance had to say this week about the banking sector 'progress' (emphasis is mine):

"With PCAR capital investments and the Bank of Ireland sale, confidence started to return to the banking sector. [this refers to 2011]"

"In 2012 we have witnessed further tangible signs of stability. …Even though non-performing loans continue to grow; here again there are tentative signs that in the mortgage arrears area the growth in new arrears has been arrested. 

The banks still have a lot of work to do to roll out sustainable mortgage solutions, but this process is underway.

Importantly, confidence is returning to our banking system following its recapitalisation.  Deposits across the Irish system are up 2.5% with stronger growth recorded by AIB, BOI and PTSB (which are up 5.3%).

We are in a situation now where the domestic banking system is getting stronger, albeit from a very weak starting point.

• The large scale balance sheet restructuring has been completed;
• BOI have completed the disposal of non-core portfolios
• AIB have substantially completed their disposals. 
• The funding gap has been significantly reduced and the drawing on Eurosystem funding by our government supported going-concern banks continues to decline, and is now less than €60 billion (excluding IBRC).
• Importantly, as I said earlier deposits are growing and the banks are back in the funding markets."

So, in other words, we should expect Ireland's banking system to have performed well in progressing since 2009-2010 lows?

Here's the chart:

In reality, courtesy of Euromoney surveys, we know that Irish banking system stability has deteriorated, not improved, between September 2010 and November 2012, and this deterioration was the second largest amongst 37 European countries.

1/12/2012: Ireland - still the second worst banking sector in EA

Another Euromoney risk survey on and the results for the banking sector are out:

Ireland's banking sector zombies are ranked as 4th least safe in the entire Europe of 37 countries. Next to Greece (3rd least safe), and Macedonia (1 place ahead of Ireland - 5th least safe). Iceland, having defaulted and demolished its banks, ranks 7th least safe. Note, Ireland remains the second weakest banking sector in the EA17.

Of course, our 'leaders' would say that yes, things are bad, but they are improving... hmm...

Are they? Well, sort of. Ireland's score (higher score, greater systemic stability) have risen in 11 months of 2012, but the rise was far from spectacular. Ireland's improvement in the score is 7th largest in the sample, behind that for Iceland.

Ireland's gap to the peers (Advanced Small Open Economies) in overall score is about 4.4 points. 11 months of heroic Government reforms have yielded a gain of 0.2 points in Irish position, and the deterioration in the overall euro area climate has resulted in a decline in the average ASOE score of 0.07 points. This means the spread improved in favour of Ireland by less than 0.3 points in 11 months - a rate of 'reforms' that can close the current gap, assuming continued deterioration in ASOE average, over  161 months. In other words, unless the 'reforms' in Ireland's banks start bearing fruit much faster than they have done in 11 months of 2012 so far, it will take us 13.4 years to reach ASOE average levels of banking system stability.

13/10/2012: Europe's Banks are now Global Growth Zombies

Back in 2011 the IMF was concerned that in the current crisis, the European banks will withdraw / deleverage from/out Asia Pacific and other emerging regions, thus reducing the supply of credit there. 

I thought the concern to be completely misplaced. My view is currently for accelerating maturity of the credit and financial services markets in the middle income economies and emerging markets, leading to increasing independence of these regions from funding from the West and rising self-sufficiency of internal markets. In contrast to the IMF, I posited the proposition that the deleveraging of the European banks out of Asia Pacific will (1) lead to enhanced credit activity in the region itself, as regional players exploit economies of scale from buying out European operations assets, and 2) result in the reduced supply of credit in Europe, as Asian and other middle income economies' banks focus more their efforts in internal Asia Pacific markets, while using Latin American and African markets as the platforms for deploying home-grown expertise in financing rapid growth activities.

I said this then… and the evidence is coming in now to show that I was right. Today's data from the Euromoney Credit Risk analytics shows that European banks are pulling out of the merging and middle-income markets, globally, and that "the real surprise is not the pace of retreat but the speed at which the gaps are being plugged".

Per ECR: "As [the European banks] slink home to shore up capital and preserve their dwindling reserves of credibility, they leave yawning gaps that are in most (but not all) cases quickly and happily filled by non-European rivals. …Is this, in terms of long-term global reach and relevance, curtains for Europe’s battered banks, and if it is, will anyone really miss them?"

Here's some evidence: 

• "In the first eight months of 2007, the last calendar year of growth before the financial crisis, the global syndicated loans market was dominated by European banks. Eleven filled the top 20 rankings, according to Dealogic, with five in the top 10 alone. Scroll forward five years and only two names, Barclays and Deutsche Bank, sneak into the global top 20."
• "In the first eight months of 2007, nine European lenders jostled for position at the sharp end of the pan-Asia Pacific syndicated loans markets. By 2012, just two names, HSBC and Standard Chartered, featured in the top 20, and both, it can be argued, are emerging markets specialists with their roots and futures fixed firmly in Asia."
• "The most notable national absence involves France’s leading standard bearers: the likes of BNP Paribas, Société Générale and Crédit Agricole, names that once bestrode Asia, particularly in areas like trade and project finance. In just five years, all three have disappeared almost entirely from every conceivable bank ranking."
• "In Africa, the pace of [European banks] extraction is slower but just as systematic. In Latin America, some European names are selling off the silverware piece by piece; others simply cannot appear to get out fast enough."
• In Africa's banks league tables, "just three European names sneak in, while the top-20 table is a cultural sprawl of names and geographies. Four African banks – against none in 2007 – make the rankings, along with lenders from Japan (three of them), Russia (one), and the Middle East (three). Perhaps the most compelling two names, however, squeeze quietly into the table at eighth and 15th: China Construction Bank and Industrial and Commercial Bank, Beijing’s third-largest and largest lenders by market cap respectively. This is the first time over the past five years that any Chinese lender has made it into the top 20 in the pan-African syndicated loan table, but given Beijing’s apparently unstoppable rise and the seemingly inexorable waning of Europe’s financial star, surely not the last."

But the departure of European banks is being compensated for by growth of domestic finance:

• "Europe’s mass departure has been treated with a mixture of unrestrained glee and raw opportunism across Asia; whenever a European financial asset has been on the block, buyers – mostly Asian – have flocked to buy it. …Western lenders, reckons RBS Capital Markets, sold $12 billion worth of equity stakes in emerging markets in the 24 months to end-June 2012 – and over half of that sell-off has taken place in Asia."
• "In January 2012, HSBC sold its credit card business in Thailand to Bank of Ayudhya for $115 million." 
• In May 2012, "Malaysia’s CIMB completed a deal to buy most of RBS’s Asia investment banking and cash equities business for $142 million.. giving the group instant global scale."
• Dutch ING is "seeking to shed assets as fast as it possibly can: it is currently trying to sell its €43 billion Asian funds business, it has already divested a majority stake in its Chinese life insurance joint venture, Pacific Antai, to China Construction Bank, and is now looking to exit its 26% stake in an insurance joint venture with Indian battery producer Exide Industries."
• ANZ is absorbing its $550 million acquisition of the bulk of RBS’s Asia retail banking assets, and the Australian banking group "is hungry for more deals."

European banks' deleveraging – lasting from mid-2009 to the present day – has been led "… by what critics called short-sighted regulators in Brussels, Paris, Frankfurt and London desperate to boost liquidity to avoid a repeat of the financial crisis":

• Basel III rules insist on tier-one capital levels of at least 9%. 
• Political pressure is "brought to bear on, say, French banks by French politicians to ensure that French banks, first and foremost, lend French money to French clients. The same reverse-protectionism move is being played out by lenders in the UK, Belgium, Spain and the Netherlands. Pressures were put by the UK government on nationalized RBS and Lloyds to lend more to British companies, while Belgium’s KBC, which has received state aid, has sold non-core assets to focus more on its home market. Spanish Santander and other big banks are buying Spanish government bonds, according to dealers, while ING’s biggest exposure is the Netherlands, some analysts say."

The contrasting story is now with the US banks, with little evidence of these aiming to deleverage by reducing their emerging markets exposures:

• Citi "remains a top 10 player in the syndicated loans market in the first eight months of 2012 in both Latin America and Asia Pacific, just as it was in the same time period five years ago, while retaining its number one position in Africa syndicated loans."
• "JPMorgan, Citi and Bank of America Merrill Lynch filled out the top three spots in global syndicated loans for the first eight months of 2007; fast forward five years and those same players now rank first, second and fourth, separated only by Japan’s Mizuho."
• "Non-US developed-world banks are also boosting their presence in key markets at Europe’s expense."

Asia Pacific story is now also playing out in Eastern Europe and Latin America:

• "A few non-European lenders are pushing into the eastern half of Europe in search of bargains" 
• Russian Sberbank "…snapped up Volksbank International, the CEE and central Asia division of Austria-based Oesterreichische Volksbanken, for €505 million ($710 million)." 
• "… in 2011, SocGen sold its booming consumer finance, ProstoKredit, to Eurasian Bank, owned by three Kazakh and Russia oligarchs."
• Latin America "…is a region crammed with outperforming economies as well as banking groups transformed, in less than a decade, from lepers to would-be global leaders, notably the likes of Itaú Unibanco and BTG Pactual, both Brazilian, and Davivienda and Grupo de Inversiones Suramericana (Grupo Sura), both Colombian. All are ramping up their presence around Latin America, mostly at the expense of retrenching European names."
• "RBS was the first to cut and run, exiting Brazil last year, followed in short order by its withdrawal from Chile, Venezuela, Colombia and Argentina."
• Grupo Sura in 2011 completed a deal "to buy the entire Latin American operations of ING, in another blanket deal."
• HSBC sold its operations in Costa Rica, El Salvador and Honduras in September last year to Davivienda for a shade over $800 million. 
• "Spain’s Santander, one of Latin America’s biggest banking groups… shed its operations in Colombia, where it was a peripheral player, pocketing $1.225 billion."
• "In September, Mexico’s Grupo Financiero Banorte (GFB) announced it was formally running the rule over pension fund assets owned by Spanish lender BBVA in Chile, Colombia, Mexico and Peru. BBVA is open, even eager, for a sale; in a statement to the Mexican Stock Exchange, GFB announced its intention to explore “opportunities to generate greater scale in the pension and retirement fund business”. BBVA manages $70 billion-worth of assets in the four countries, generating a combined profit of $300 million."
• "Again, deleveraging in Latin America appears to be the sole purview of twitchy European lenders. Scotiabank is quietly gaining strength in Latin America: the Canadian lender shelled out $1 billion last year to buy a majority stake in Colombia’s Banco Colpatria, its 20th acquisition across the region in the past six years. Citi remains solid across the region, while UBS, an investment bank more global than Swiss by nature, pumped $500 million into Grupo Sura before its ING raid."

The core problem with this is that quick deleveraging out of growth-focused regions spells diminished prospects for future profits growth for European banks and loss of access to rich deposits rapidly growing on foot of rising incomes in the regions outside sick Europe. As I warned a year ago, contrasting the IMF alarmist views, Asia, Africa, Latin America and Eastern Europe will probably be fine in the short run as European banks run for the exit. In the long run, these regions' banking systems are likely to be strengthened by the current processes. Instead, the real risk is for the European lenders who are likely to be relegated to the back water of credit growth - the stagnant pool of the euro area economies. 

Thus, the real question about the future is not 'What if Europe's banks stop lending in Asia?' (as posited by the IMF), but rather 'What if the Asian banks won't care for lending in Europe?'

7/10/2012: Goldman on Euro Area banks

Some very interesting stats on the Euro Area (comparatives) banking sector from the recent (October 4) research note from the Goldman Sachs (link here). Here are some bits:

In a recent (October 4) presentation to retail investors in Cork I was speaking about the mismatch in non-financial corporations funding sources between the US and Euro Area. My conclusion was that in the medium term (2013-2015) Euro Area corporates will be forced to increase issuance of corporate bonds since their preferred source of funding - banks lending - is going to stay subdued on supply side, while the equity issuance cannot absorb simultaneous deleveraging of the banking sector, and demand for increased equity from the corporate sector, especially as Governments across the EU are going into 'tax-em-to-hell' mode when it comes to potential investors.


Here are two charts from GS note on the same:

And where are banks largest, dominant players in the economy? Why, in usual suspects...

Now, what's the problem with the above chart? Oh, let's see: Swiss and UK bankers are bankers to the world, with more exposures to assets outside their countries than inside. Irish banks listed include some IFSC banks, but... adjusting for that and adjusting for GNP/GDP gap, Irish figure is as follows:

• Covered banks: 295% of GNP as of Q2 2012 (using 2011 GNP)
• Total Assets of Domestic Group of banks as of August 2012 are 447% of 2011 GNP. Of these, 318% are purely assets relating to Irish residents.

Thus, if we are to control for the international exposures of the banks, the same relative position for Ireland is most likely to be maintained as in the chart, albeit the numbers will be smaller across all banking systems. And now think of adjusting these for the quality of assets held... and weep.


And here's a note for Michael Noonan and his friends at Irish banks: this time it is NOT going to be much different:

Do note the above is in nominal Yen, which is kinda telling - Japanese banks have not grown since 1990, inflation-adjusted, through probably 2009-2010. And that with Japanese printing cash and piling up public debt like there is no tomorrow between 1990 and today. What hope is there for the return of lending and profitability in Irish banking ca 2014 that the Central Bank and the Government and the banks have been betting on throughout their disastrous disaster management practices 2008-present?


Lastly, here are two tables neatly summarizing the epic fiasco of European (and Irish - see second table) banking:

Do note prominent positioning of Ireland's zombies, right there, with Tier Last Marfin, B of Cyprus, and Dexia...


Now for a quote... but wait a second first a preliminary set up: Irish Government claims that new regulatory regime will be a departure from the past for Irish banking. The same Government claims that too much competition in Irish banking was contributing to regulatory failures. So a duopoly of BofI + AIB zombies should foster more effective regulatory regime, right? Oh... Goldman on that (italics mine):

"At the other end of the spectrum, countries with central banks as their supervisor have generally done better, the two exceptions being the Netherlands and Ireland (where supervisors fared badly owing to the huge size of the banks that these countries had relative to their GDP – the sheer size of these made it much too difficult to supervise these, ‘too big to save’ banks in these cases)." So, tell me - if having TBTF banks = "much too difficult to supervise" banking system, how will having Duopoly banking system help supervisory effectiveness? Answer: it will hinder such effectiveness. Instead of being captive to a bunch of banks, Irish regulatory regime will be captive to two banks - incidentally, the very same ones that led capture of regulators back in 1990s-2000s.

Let's stop the reading here...


Update: In a fair criticism of the GS report, it ignores Solvency II implications, although does cover Basel III and Dodd-Frank. Solvency II omission was pointed out by the @creditplumber / David McKibbin.