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€8 Trillion Problem For European Banks.

  • Written by Syndicated Publisher 49 Comments49 Comments Comments
    August 28, 2011

    The Financial Times reports US funds show true state of eurozone banks.

    Morgan Stanley, calculates that of the €8,000bn funding that is currently in place for the largest 91 eurozone banks, some 58 per cent needs to be rolled over in the next two years. More startling still, some 47 per cent of this funding is less than a year in duration. Much of that is in euros.

    However, as the saga of the money market funds shows, eurozone banks have been raising short-term dollar funds too, either to finance their portfolios of dollar assets, or to provide a cheap form of funding (which is then swapped back into euros.) The scale of this reliance is – thankfully – not nearly as large as it was in, say, 2007; back then eurozone banks had a vast network of dollar-funded mortgage vehicles, creating a funding mismatch that was about $800bn, according to the Bank for International Settlements. Nevertheless, some element of this mismatch remains; hence the current crunch.

    Is there any solution? In the long term, some eurozone banks probably need to rethink some of their funding profile. In the short term, however, Huw van Steenis, an analyst at Morgan Stanley, has recently been promoting another interesting idea: eurozone authorities should offer joint guarantees for debt issued by banks, as a form of “circuit breaker” to counteract panic.

    Circuit-Breaker Silliness

    The idea that banks can guarantee each others’ debt is complete silliness. I have a better idea. How about banks not borrow-short and lend-long?

    All banks have to do is not lend money for longer than they have access to it. If they did that, they would not be constantly rolling loans. If banks want to lend for 5 years they should secure money for 5 years.

    It really is that simple.

    Might this kill 30-year mortgages? Yes, so what?

    Lending money for longer than you have ownership of it (secured right-to-use) should be illegal.

    Swelling Deposits From Europe

    Please consider U.S. Banks Seek Relief on Swelling Deposits

    U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

    Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.

    Regulators have asked banks to take the deposits anyway, three people said, with one lender accepting $100 billion. The regulators want lenders to take the deposits because it improves the stability of the financial system, according to one of the people, who said U.S. banks are viewed as places of strength.

    Cash Cache

    Cash held by domestically chartered U.S. banks, which includes Federal Reserve balances, rose to a record $1.02 trillion earlier this month, up 27 percent from the end of July last year. Deposits held by the 25 largest lenders expanded to $4.69 trillion in the week ended Aug. 10, up 8.5 percent from the end of May. The Fed’s balances advanced to $1.61 trillion as of Aug. 24, from $1.05 trillion a year earlier.

    The extra deposits are problematic because they’re subject to withdrawal, so banks have to park the money in low-yielding short-term investments, Litan said. With few other choices available, banks have stashed their excess deposits at the Fed, which means the cash gets counted as assets.

    Charging Depositors

    At least one firm, Bank of New York Mellon Corp. (BK), tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

    FDIC insurance fees for large banks typically average more than 0.1 percent, three of the people said. In addition, large banks also may apply an internal capital charge of at least 0.1 percent to such reserves, one bank executive estimated.

    Most of JPMorgan Chase & Co. (JPM)’s almost $53 billion in new deposits in the second quarter were tied to Europe, according to Pri de Silva, a New York-based analyst at CreditSights Inc.

    “If you are a bank you don’t want to use excess capital for these hot-money deposits,” de Silva said.

    Yield Curve Table

    Duration U.S. Japan Germany UK
    3-Month -.01 0.10 0.97 0.51
    6-Month 0.02 0.11 0.56 0.59
    12-Month 0.08 0.12 0.59 0.53
    2-Year 0.19 0.14 063 0.59
    3-Year 0.32 0.17 0.67 0.75
    5-Year 0.93 0.34 1.20 1.36
    7-Year 1.52 0.59 1.63 1.84
    10-Year 2.18 1.04 2.14 2.49
    30-Year 3.55 2.01 2.98 3.75

    Dash for Cash Sends Short-Term Rates Negative Again

    Note that 3-month T-Bills are yielding a negative .01% as demand for safety has shoved aside any concern to make a profit. However banks pay .10% for FDIC insurance.

    Thus banks are losing .11% unless they charge fees. BNY Mellon has done just that, charging .13% for large deposits.

    That large deposits keep flowing in from Europe says stress in European banks continues to simmer under the surface.

    Mike “Mish” Shedlock
    http://globaleconomicanalysis.blogspot.com

    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.
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