Transatlantic Financial Risk Inverts: European Bank Default Risk Greater Than American For First Time

Tyler Durden's picture

One of the oddest phenomena over the past two years has been the relative outperformance of European bank CDS compared to their transatlantic counterparts. Well, this peculiar relationship has now ended. European banks are finally, on average, riskier than American ones. Investors have finally realized that "regulatory capitalization" in Europe is an even more ephemeral concept than in the US. Furthermore as JPM pointed out yesterday, not only do European banks use more leverage, but the "the larger size of Europe’s banks argue against using simple GDP weights to assess potential risks to global markets.  Due to a buyer’s strike over the last month, European banks now have 3.5x as much debt to issue than U.S. banks over the remainder of the year." Also, as we have been pointing out every single day for the past week, European banks, or at least those that have excess liquidity, have been storing more and more of their euros with the Central Bank, instead of lending it out. Add to this the relentless rise in EUR Libor, and this trade should have been a no-brainer for months.

Bank of America adds some more perspective, and some more bias for their Long US Banks trade:

Financial Regulatory Reform and contagion from the European sovereign crisis are the two main issues weighing on U.S. bank spreads. Our view is that Financial Regulatory Reform makes bank credit safer by de-risking financial institutions. While the loss of systemic support is countering that, fundamental improvement dominates both from reform requirements but also from the steep yield curve and general turn in the credit cycle.

Furthermore the rating agency response to passage of the Senate bill has been to postpone their decisions on removing uplifts to bank ratings based on systemic support. That removes the immediate threat of ratings  downgrades that could leave some banks with diminished access to the short term market. Overall we find that the liquidity situation in the banking sector is quite favorable. U.S. banks have about $750bn in bond maturities through 2012but significant liquidity buffers.

While we think U.S. banks should decouple from the ongoing European sovereign crisis, and we remain overweight U.S. banks, clearly Friday’s weak U.S. employment report delayed that decoupling

Alternatively, now that the boat is shifting from port to starboard, the real question is when will enough people scream that the US financial sector has no clothes loud enough, to get the investing community excited enough to go from a European to a US financial short once again. Although with banks allowed to avoid all of the important accounting rules in the US, we don't think this will happen for a long, long time.

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Rick64's picture

So the best horse in the glue factory award once again goes to the U.S..

Mr Lennon Hendrix's picture

This and the glue factory's roof is on fire.

DoChenRollingBearing's picture

Buying any banks would be at the very bottom of my list of investments, says the Bearing, an unhappy FAZ holder, so take my investment suggestions with a rock of salt.

Muir's picture

A blast from the past from zero



"On September 30, 2008, the SEC and the FASB issued a joint clarification regarding the implementation of fair value accounting in cases where a market is disorderly or inactive. This guidance clarifies that forced liquidations are not indicative of fair value, as this is not an "orderly" transaction. Further, it clarifies that estimates of fair value can be made using the expected cash flows from such instruments, provided that the estimates reflect adjustments that a willing buyer would make, such as adjustments for default and liquidity risks."


pure art.

you gotta admire it

Muir's picture

for those that forget:

(look at the dates please)



Section 132 of the Emergency Economic Stabilization Act of 2008, titled "Authority to Suspend Mark-to-Market Accounting" restates the Securities and Exchange Commission’s authority to suspend the application of FAS 157 if the SEC determines that it is in the public interest and protects investors.

The Emergency Economic Stabilization Act of 2008 was passed and signed into law on October 3, 2008. On October 7, 2008, the SEC began to conduct a study on "mark-to-market" accounting, as authorized by Sec. 133 of the Emergency Economic Stabilization Act of 2008.[15]

On October 10, 2008, the FASB issued further guidance to provide an example of how to estimate fair value in cases where the market for that asset is not active at a reporting date.[16]

On December 30, 2008, the SEC issued its report under Sec. 133 and decided not to suspend mark-to-market accounting.[17]

On March 10, 2009, In remarks made in the Council on Foreign Relations in Washington, Federal Reserve Chairman Ben Bernanke said, "We should review regulatory policies and accounting rules to ensure that they do not induce excessive (swings in the financial system and economy)". Although he doesn't support the full suspension of basic proposition of Mark to Market principles, he is open to improving it and provide "guidance" on reasonable ways to value assets to reduce their pro- cyclical effects.[18]



On March 16, 2009, FASB proposed allowing companies to use more leeway in valuing their assets under "mark-to-market" accounting, a move that could ease balance-sheet pressures many companies say they are feeling during the economic crisis.





lsbumblebee's picture

Here's a quote with some meat on it from Bob Chapman:

"...the euro still has about 7% gold backing, something the US dollar and all other currencies do not possess."

LeBalance's picture

good luck finding that physical.

lsbumblebee's picture

Forget physical. The market certainly has. The point is that for what it's worth anymore, the Euro is at least partially backed by gold, and the dollar is backed by Mr. Whipple.

jdrose1985's picture

*convertibility to gold/oil

PeterB's picture

If Ben Bernanke is Mr Whippee then I'll take one double dip choc top thanks. Oh! don't forget that many a good cock has come out of a tattered bag.

buzzsaw99's picture

Skank of Amurkin is uber-smart.

FranzVanDongen's picture


20-seat loss forces early exit for Dutch PM as party leader


Liberal party won the elections. It wants to cut spending with 23 billion a year. More deflation.


williambanzai7's picture

The AIG bailout was one big whitewash. Now the paint is wearing thin on the Euro bailout whores.

aus_punter's picture

there is always the risk that some european banks become nationalised and their liabilities become government obligations , hence leading to a tightening in their credit spreads somewhat

a popular trade has been to go long risk via the banks index and short corporates against it based on the view that higher funding costs will be passed on and that the relationship has to normalise..... not going to happen that way IMO

Celsius's picture

US banks are insolvent. Without properly applying FASB 157 there is no way that one can claim US banks are in better shape the Europe's.