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The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!
- Bank Run
- Barclays
- Bear Stearns
- Bond
- Book Value
- CDS
- Counterparties
- Covenants
- CRE
- CRE
- default
- ETC
- European Central Bank
- Eurozone
- Fractional Reserve Banking
- France
- Funding Mismatch
- Greece
- Ireland
- Italy
- Japan
- Lehman
- Lehman Brothers
- Portugal
- Regional Banks
- Repo Market
- Sovereign Debt
- Sovereign Default
- Standard Chartered
- Stress Test
- United Kingdom
The subject of our most recent expose on
the European banking system has a plethora of problems, including but
not limited to excessive PIIGS exposure, NPA growth up the yin-yang,
Texas ratios and Eyles test
numbers that’ll make you shiver and razor thin provisions. Focusing on
the most pertinent and contagious of the issues at hand leads us back to
the initial premise of a European bank run. I laid the foundation for said topic discussion last Thursday in "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style" and the fear du jour is a European version of the Lehman Brothers or Bear Stearns style bank run. The aforelinked at explanatory piece is a must read precursor to
this illustration of what can only be described as the anatomy of a
European bank run - before the fact. Remember how the pieces of the
puzzle were perfectly laid together for a Bear Stearns collapse in January of 2008, two months before the bank's actual collapse? Reference "Is this the Breaking of the Bear?" in which Bear Stearns collapse was illustrated in explicit, graphic detail. Lehman Brothers wasn't impossible to see either (Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008).
I
would also like to make it clear that it is my opinion that the EU
leaders who insist on issuing "alleged" bank stress tests that assume
its constituency are moronic simply add fuel to the bank run fire. The
refusal to test for the concern that the entire bond market has simply
feeds uncertainty in lieu of alleviating it, reference Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run.
The
"alleged" stress tests did not test for sovereign default and its
effect on HTM inventory, which is already priced into the system and
which is the primary worry of the markets. Thus, the stress test results
are largely irrelevant.
It's as if I have AIDS and I go to the doctor and pass a test for measles... Does that make my multiple partners (counterparties , lenders and customers) more or less comfortable with my condition?
We have run our own numbers and produced alternative, more realistic scenarios including exposure, haircut assumptions and writedowns for individual countries. Specifically, we have applied writedowns on both banking and trading books with the results available in the subscription document 
The Inevitability of Another Bank Crisis? and well as European Bank's Greece exposure.
In essence, after Lehman Brothers collapse, sovereign states appear to
deem themselves obligated to bail out their respective insolvent banking
systems, thus real stress tests should test both the banks' distressed
portfolio carried at unrealistic marks and leverage and the sovereign's
ability to aid said banks. Of course, this will be very unpopular from a
political perspective because you will get a lot of nasty answers to
the questions asked.
Below is a chart
excerpted from our most recent work showing the asset/liability funding
mismatch of a bank detailed within the report. The actual name of the
bank is not at issue here. What is at issue is what situation this bank
has found itself in and why it is in said situation after both Lehman
and Bear Stearns collapsed from the EXACT SAME PROBLEM!
Note: These charts are derived from the subscriber download posted yesterday, Exposure Producing Bank Risk (788.3 kB 2011-07-21 11:00:20).
Overnight and on demand funding is at a
72% deficit to liquid assets that can be used to fund said liabilities.
This means anything or anyone who can spook these funding sources can
literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.
In reviewing my post on this topic in January predicting the fall of Bear - "Is this the Breaking of the Bear?", it is actually scary how prescient it actually was...
Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back
Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls
stating that this and that stock is cheap because it is trading at or
below its book value. They then go on to quote the historical
significance of this event, yada, yada, yada.
This is then picked up by a bunch of other individual investors, media
pundits and other “professionals,” and it appears that rampant buying
ensues. I don’t know how much of it is momentum trading versus actual
investors really believing they are buying on the fundamentals, but the
buying pressure is certainly there. They then lose their money as the
stock they thought was cheap, actually gets a lot cheaper, bringing
their investment down the crapper with it. What happened in this
scenario? These investors bought accounting numbers instead of true
economic book value. Anything outside of simple widget manufacturers are
bound to have some twists and turns to ascertain actual book value,
actual marketable book value that is. This is what the investor is
interested in, the ECONOMIC market value of book, not what the
accounting ledger says. After all, you are paying economic dollars to
buy this book value in the market, so you want to be able to ascertain
marketable book value, I hope it sounds simplistic, because the premise
behind it is quite simple – How much is this stuff really worth?. The
implementation may be a different matter, though. I set out to ascertain
the true book value of Bear Stearns, and the following is the path that I took...
I urge all to review
that post of January 2008 and realize that negative equity is negative
equity, and no matter how you want to label it, account for it, or delay
and pray, broke is broke! This lesson should not be lost on the
Europeans, but unfortunately, it is!
The
problem then is the same as the European problem now, leveraging up to
buy assets that have dropped precipitously in value and then lying about
it until you cannot lie anymore. You see, the lies work on everybody
but your counterparties - who actually want to see cash!
Using this European bank as a proxy for Bear Stearns
in January of 2008, the tall stalk represents the liabilities behind
Bear's illiquid level 2 and level 3 assets (including the ill fated
mortgage products). Equity is destroyed as the assets leveraged through
the use of these liabilities are nearly halved in value, leaving mostly
liabilities. The maroon stalk represents the extreme risk displayed in
the first chart in this missive, and that is the excessive reliance on
very short term liabilities to fund very long term and illiquid assets
that have depreciated in price. Wait, there's more!
The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":
The modern central banking system has proven resilient enough to
fortify banks against depositor runs, as was recently exemplified in the
recent depositor runs on UK, Irish, Portuguese and Greek banks – most
of which received relatively little fanfare. Where the risk truly lies
in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties
and/or depositors pull liquidity, covenants are tripped that often
demand additional capital/collateral/ liquidity be put up by the
remaining counterparties, thus daisy-chaining into a modern day run on the bank!
I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty
run to happen today? You know, with the full, unbridled printing press
power of the ECB, and all..." Well, don't bet the farm on
overconfidence. The risk of a capital haircut for European banks with
exposure to sovereign debt of fiscally challenged nations is inevitable.
A more important concern appears to be the threat of short-term
liquidity and funding difficulties for European banks stemming from said
haircuts. This is the one thing that holds the entire European banking
sector hostage, yet it is also the one thing that the Europeans refuse
to stress test for (twice), thus removing any remaining shred of
credibility from European bank stress tests. As I have stated many time
before, Multiple Botched and Mismanaged Stress Test Have Created The Makings Of A Pan-European Bank Run!
The
biggest European banks receive an average of US$64bn funding through
the U.S. money market, money market that is quite gun shy of bank
collapse, and for good reason. Signs of excess stress perceived in the
US combined with the conservative nature of US money market funds
(post-Lehman debacle) may very well lead to a US led run on these banks.
If the panic doesn’t stem from the US, it could come (or arguably is coming), from the other side of the pond. The Telegraph reports: UK banks abandon eurozone over Greek default fears
UK banks have pulled billions of pounds of funding from the euro zone as fears grow about the impact of a “Lehman-style” event connected to a Greek default.
Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to euro zone banks, raising the prospect of a new credit crunch for the European banking system.
Standard Chartered is understood to have withdrawn tens of billions of pounds from the euro zone
inter-bank lending market in recent months and cut its overall exposure
by two-thirds in the past few weeks as it has become increasingly
worried about the finances of other European banks.
Barclays
has also cut its exposure in recent months as senior managers have
become increasingly concerned about developments among banks with large
exposures to the troubled European countries Greece, Ireland, Spain,
Italy and Portugal.
In its interim management statement, published in April, Barclays
reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn
last June, while its exposure to Italy has fallen by more than £100m.
One source said it was “inevitable” that British banks would look to minimise their potential losses in the event the euro zone crisis were to get worse. “Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.
Moves
by stronger banks to cut back their lending to weaker banks is
reminiscent of the build-up to the financial crisis in 2008, when the
refusal of banks to lend to one another led to a seizing-up of the
markets that eventually led to the collapse of several major banks and
taxpayer bail-outs of many more.
Make no mistake - modern day bank runs are now caused by institutions!
Below is an excerpt of an email exchange that I had with Eurocalypse, the European CDS trader that contributes trade setups to BoomBustBlog (click here for his background), who happens to have ran an ALM department in a sizeable French bank.
FYI, im hearing from my well connected friends that the Chairman of the BoomBustBlog bank run candidate in question has been seeing Sarkozy everyday recently...
Im
very surprised about the extent of the ALM gap from the BRC ("Bank Run
Candidate"), but my guess is that balance sheet is including the trading
books.
Typically the biggest chunk of the balance sheet are govt bonds, and they are refinanced with the repo market. That should explain a lot of the gap.
I dont think the ALM managers manage that gap, and I dont think they should either. Info on the ALM gap ex-trading book should be monitored.
The trading activity is monitored by a market risk group with another
set of limits, and of course they would monitor liquidity, closely
hopefully.
Of note, there are new official liquidity
ratios put in place in Basel III (the LCR Liquidity Coverage Ratio which
is a 1 month ratio, and the DFSR which is a 1 year ratio). Basically,
Govt bonds are considered as the ultra liquid assets, and actually the
LCR forces the banks to hold liquid assets against their 1 month gap
calculated with some liquidity assumptions both on the asset and
liability side) of course these liquid assets, will mostly be govt bonds
in practice, because there is not anything more liquid, and not
anything else in sufficient size...
The
question is, exactly how liquid are the bonds of sovereign Greece,
Ireland and Portugal. Much of this stuff should rightfully be
classified as level 3 assets. The 50% depreciation in the Greek long
bond should really, really cause many to rethink both the logic and the strategem behind so called "risk free asset" classes!!!
I'm not saying there is no liquidity risk on the trading books. Effectively if there are signs of stress in the repo market, all players will try (at the same time...) to reduce the size of their trading books ... leaving the market bidless... but its not the intent of banks to try to make profit on the liquidity gap in that case.
Finally the big picture, I think one cannot again ignore that the
banking sector and govt debt are totally intertwined as I wrote before.
Ultimately, the collapse of the banking sector means the collapse of
govt finances and vice versa.
Its a FEATURE of a fractional reserve lending system where the eligible
asset of choice is those govt bonds, and of a system where govts
can freely float more and more debt (as long as there is demand), as
money is created by the CB in the process, which end up in the liability
side of private banks which then need to buy something etc...
On the liquidity side, many French regional banks were overextended with loan to deposit ratios over 120% (despite being deposit-rich institutions). The main reason is they boosted a lot retail mortgage activity.
Anyway, in France, were converging with Japan.
- Tough
competition within banks, shrinking margins (consumer laws against
predatory lending in France, French banks earn a lot of money from the poorer clients who have temporary deficits on their checking accounts). - The housing and CRE market bubble has not exploded yet (Paris home prices are at the highest ever).
- Then there is the Euro crisis on top of that
- ...and the govts wanting to levy more banking taxes...
The sector should be a HUGE UNDERPERFORM! The
only way they can make money in the future, is buying those govt bonds
and sitting on them, like the Japanese banks...and pray for the bond
market not to explode like in Greece!
Or Portugal, or Ireland, or...
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Mighty midget man from France says no collapse. Lady Godzilla from Germany says I'll arbeit like an honest german. And arbitrate like a selfish german. Then run like a cautious german! So you can take your pick in this tower of babel called the EU. Only Van Rompuy who is belgian and therefore from nowhere except Bilderburg castle says its OK folks Greece is saved, the greeks are moussaka, and so the sheeples will stay quiet in all of EU land where we the elected and our Oligarchal overlords, decide how far we kick the can before we pull the plug on sheeple's remaining money and pensions. Good luck land of Zeus and Europa, or it'll be pitchfork time as in 1789!
How's the Apple short doing ?! It's sad that everything Reggie now writes (oh, by the way this is not behind the paywall of course - it doesn't really count) is now coloured by the Apple Fiasco. A shame.
I regard his function as calling my attention to situations; it's up to me to read the charts, take a position or not, and have a stop loss. It's extremely difficult to predict when the irrational exuberance will revert to the mean; anyone who makes predictions will get burned sometime; me included. But it is pathological; and it will revert; and Fridays performance looks like a great short to me.
Excellent article, Reggie. Thank you.
My question to Reggie is: How do we capitalize on this collapse? How do we play it here in the U.S. to benefit being short? What is the timeframe? Governments have been kicking this can down the road, lying at will, and faking real asset values for 3 yrs now since the last collapse, so when is this expected to materialize? Just wondering.....I believe it is going to happen, just not sure how long these clowns can keep the chirade up.
by having a significant part of your long term savings in Silver Bullion; this is short the banking system and the timing will anounce itself.
you'll have to pay from him to spell it out!
duplicate sorry
Only a restructuring of the international monetary system and its underlying economic theories will help resolve the sovereign debt crisis in the US and Europe.
Check out the latest from the Capital Research Institute (CRI):
The Financial System - A House of Cards
Apple is like Eve she bites big chunks of meat. Never underestimate an Eve that's been scorned by a RM!
you need to put the Apple discussion in context, the context as defined and fenced by Reggie himself, which is versus that collection of also-ran junk, Google
Reggie, I am still waiting for Apple's margins to fall. Let's be honest here. Just like CNBC guys, if you repeat something for a long time, it will eventually become true. I am sure that one day Apple's margins will fall and the stock will come down from 500 to 400 and you will come back here and gloat about it. Nevermind that people listening to you missed on a ton of run up.
So, your analysis is that APPL is going to 500 ? You're wrong. fuck the margin. look at the chart. you need to short this sick fuck of an "irrational exuberance" right now. It's done; stick a fork in it. This is the way tops look; just like this.
yes, viva les oligarchs... that's the big picture!
Be that as it may, they will paper it all over. There is a larger picture at play here and it is quite apparent they won't let technicalities or the truth stand in their way.
Amazingly absurd financial architecture........just getting yields on depleting assets generally do not have a happy long term outcome.
Not enough money invested in basic life support is a recipe for disaster.
The oil spoils of WW II is so over.
RM doesn't tell us who will implode first the EU or the US. The currency war and the fight between certain sections of the US hyper-leveraged HF market and the EU sovereigns goes on. As the sovereigns dig in deep into their centrally planned ponzi scheme and the US HF run amok with their speculative sprees. If they lose their base liquidity pump at home thanks to BB, they will then go mad trying to make a buck where there is no growth left. So then as Archimedes would say, your lever in now in reverse leverage as your costs outweigh your ponzi gains! Who will cave in first?
Let's see how this cookie crumbles.
What happens when two high-speed bank runs collide?
the obvious answer is a train-wreck ...are you looking for something more subtle!
In no way am i disagreeing with you by asking this but "what is to be gained by an institution by initiating a bank run?" In theory it could trigger the CDO's with the banks being the primary counterparties to actual governments such as Greece, Portugal and Ireland. The fact that they are "the little countries" does makes me suspicious. Obviously "the bigger the country the bigger the problem" and not vice versa. I would take issue as well with your quoting of "book value" since "how do we value an actual country?" obviously this is what Goldman Sachs et al are precisely doing--but towards what end? yet another "The Biggest of Shorts?" That sounds beyond just dangerous to me. The word "insurrectionist" comes to mind actually. The numbers who could do such a thing are quite small--and the opposition are armies, navies, air forces and marine corps--among other things of course. i certainly wouldn't want to be knowingly engaged in such an activity--if it were happening at all of course. there are "legitimate" uses of leverage of course--as much as everyone gesticulates about housing i happen to feel in spite of the collapse the housing bubble was one of them. to listen to Joe Kernan "blame Greenspan for creating a housing bubble" shows just what a pathological nut job he and his cronies are. the point of throwing Greenspan under the bus for such a patent falsehood is clear to me: he and his ilk are pining for another bubble "to get he and his buddies out of the mess of their own making." The destruction of the housing CREDIT bubble by raising short term interest rates to insane levels was what happened and NOT "creating a housing bubble in the first place" which of course only a market can do. of course "YOU CAN'T PICK AND CHOOSE YOUR BUBBLES." My guess would be "the last type of bubble this crowd wants" is an equity bubble since this keeps their drug pimping insanity "too cheap" and interest rates "too low for too long." Plus you also have to know something about valuing an equity and the Kernan set takes it as an article of faith that the "whole game is rigged." That's why Cramer has been running circles around that set for two years...GOING ON THREE NO LESS! Moreover if such a "condition" causes state and local funding for pretty much every government program on the books to dry up (via payments on the debt being the largest federal item in the budget which it now is btw) then folks like that really do have a crisis since "there goes all their borrowing authority" because "simply put you don't understand equities." i'm fascinated to see "the Dylan Ratigan of that time" replayed. GE fired him because they were so riduclously in bed at that time with the Federal Government "to save the company" (while at the same time lying to shareholders and the public at large that all was great) they couldn't have a guy like making so much "common sense." Ridiculous of course since "he's still talking" and i imagine "still making sense." the only thing coming due now is "the bed of lies." most of the current crop of media people need to step aside now since they're so "wedded" to it they simply can no longer separate fact from fiction (though they can hang on via the department of dirty tricks i imagine.) as was said by Eisenhower of Hitler "i knew we had him beat when he believed in his own lies." and so it is with ZH'ers and (shockingly in my view) Bloomberg vs the MSM: they're simply pawning off delusional and seeing who bites. Needless to say they don't believe anything that they're saying since it's all about "the phantom money leviathans" now.
Bail and Disengage from the U.S. Government...
http://goodthoughtsgoodwordsgooddeeds.blogspot.com/2011/07/bail-disengag...
OT: Hilarious 2 Min Vid...
http://www.youtube.com/watch?v=W0Uju3tYS2s
Don't tell me!
DEXIA RIGHT?!!
And I even know who is withdrawing their accounts :)
It's a "transfer" to pay off outstanding debt, because they where not allowed to clear their accounts.
Make no mistake, Dexia is no bed of roses, but I run an investment site and Dexia's stock has already been hit very hard. The low hanging fruit has already been picked.
just like lined up Dominos