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I’m sure many of you may be asking yourselves, “Well, how likely is this counterparty run to happen today?”

Reggie Middleton's picture




 

 

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On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus. Fast forward nearly one year later and the WSJ reports Crédit Agricole Girds Greek Unit for Greece Euro Exit, as excerpted:

PARIS—Crédit Agricole SA ACA.FR +3.49% is making contingency plans to abandon its Greek bank or merge it with a conglomerate of domestic banks in the event of Greece leaving the euro zone, according to a person with direct knowledge of the plans.

The admission offers the starkest evidence yet of international companies preparing for the worst in Greece, just days ahead of elections that could set it on a path to leave the currency union. It also underscores the lengths to which France's third-largest listed bank will potentially go to draw a line under its disastrous foray into Greece.

... Crédit Agricole Chief Executive Jean-Paul Chifflet has said publicly he doesn't see a Greek exit as the most likely scenario. But the bank is pressing ahead with contingency planning focusing on two possible options, the person familiar with the matter said: consolidating its Emporiki Bank of Greece SA unit into a larger conglomerate of Greek banks, in which the French lender's stake would get diluted down to 10%, or simply walking away and letting Emporiki fail.

"Politically, if Greece were to exit the euro zone, Crédit Agricole would have no obligation to stay," said this person. The Paris-based lender is also considering plans to transfer some "good" assets from Emporiki to Crédit Agricole, the person said, without disclosing details

Abandoning Greece's largest foreign-owned retail bank could expose Crédit Agricole to legal and reputational risks and would echo its abrupt departure from its Argentine bank units 10 years ago after the Latin American country defaulted on its debt.

Analysts estimate a Greek exit from the euro zone would cost the bank at least €5.2 billion. Crédit Agricole's direct funding to Emporiki stood at €4.6 billion in March. 

...Crédit Agricole has been scrambling over the past year to stem the red ink at its Greek operations. Its acquisition of Emporiki in 2006 saddled the French lender with billions of euros in losses and is one of the reasons its shares have plunged more than 70% over the past year, sparking uproar among shareholders. Emporiki is Greece's sixth-largest bank.

Last week, the bank secured a small bit of breathing space when Emporiki finally succeeded in getting funding from Greece's central bank, the Crédit Agricole spokeswoman said. Crédit Agricole had lodged numerous similar requests to borrow from the Greek central bank's so-called Emergency Liquidity Assistance program, and was repeatedly turned down because Emporiki is foreign-owned. According to the person close to the matter, Greece's central bank finally agreed to the request, after Crédit Agricole said it would otherwise leave the country.

 This is essentially the specific institutional bank run that I warned about last year. In addition, I gave my paying subscribers plenty of notice on this particular bank back in 2010 - reference File Icon Greek Banking Fundamental Tear Sheet. As for how that institutional bank run thing works, we excerpt "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!

image006

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!

This assertion is backed by today's WSJ reporting:

A host of international companies have admitted they are working on contingency plans in the event of Greece exiting the euro, with many concerned about how to retrieve cash in the country under such a scenario. But none have disclosed potentially walking away from assets in Greece.

... Greek government officials have long pointed to the need to merge local lenders in order to help them withstand mounting problems that include huge losses arising from Greece's debt restructuring, and soaring nonperforming loans in the recession-ravaged economy.

Despite several failed past attempts, analysts now say the government could finally force this process through after it takes over a majority stake in Greece's four largest commercial banks—National Bank of Greece SA, NBG +5.99% EFG Eurobank Ergasias SA, EUROB.AT +8.04% Alpha Bank AE and Piraeus Bank TPEIR.AT +2.87% SA.

The state's bank bailout fund, the Hellenic Financial Stability Fund, is expected to underwrite about 90% of the four banks' capital increases scheduled for later this year, effectively nationalizing the banks. Emporiki could therefore be swallowed by one of the new merged entities, but it remains unclear how advanced talks are. A spokesman for the Hellenic Financial Stability Fund declined to comment.

 Remember, this is why the STATE bailouts were needed in the first place. Reference BoomBustBlog archived article Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe from back in 2010:

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing.

One would think that was rather prescient, eh? Not really, just the objective use of a spreadsheet. It gets worse, though, as read in today's WSJ article...

Even if Greece remains in the euro zone, the French lender will need to deal with rising defaults and deteriorating economic conditions. In the first quarter alone, Emporiki, which carries net loans worth €18.7 billion on its balance sheet, posted a €905 million loss.

Last week, Moody's Investor Services downgraded Emporiki's rating two notches further into junk territory.

But if we just continue reading one more paragraph down in my "Ovebanked, Underfunded, and Overly Optimistic" article from 2010:

Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

image009.png

If I saw it coming from so far back, what the hell is wrong with those French bank executives? So, back to "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!"

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!

image012

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. 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.

  1. 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).
  2. The housing and CRE market bubble has not exploded yet (Paris home prices are at the highest ever).
  3. Then there is the Euro crisis on top of that
  4. ...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...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trade and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head.

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

I will provide additional tidbits to the public as I deem fit. In the meantime, the question du jour?

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

Professional and institutional subscribers will have access to our contributing trader’s trade setups and opinions within a week and a half. Institutional subscribers should feel free to reach out to me via Google Plus for video chat and discussion this and every Tuesday at 12 pm (please RSVP via email). If you need an invitation to Google+ and are a subscriber, simply drop me a mail and I will give you one. Feel free to follow me on:

 

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Thu, 06/14/2012 - 13:30 | 2526300 printmoremoney
printmoremoney's picture

Reggie would make the ideal BIS President after the Ponzi Nation meltdown. Before he starts the job, give him ownership of enough Global Collateral Accounts that he never has even think about making money again. Then, endow him to create and lead the new system. I wonder what he would do then? He has proven he can pick apart the criminality and bonehead system under which we all accept servitude. I wonder what kind of system he would enforce at the BIS if he was in charge? Why do we all give authority to the shysters continues to amaze me. I think a new Bankster prison would take care of it. Build it at Fukushima and let them clean that up while doing their Time. A new world financial system should be run by a computer, with clear rules and total transparency. People fuck things up, if you have not noticed. Program it with humanitarian rules. If you want to kill millions and build war machines, your "loan application" would simply be rejected. No funding, no more bullshit. Or, at least a less deadly enslavement may ensue. 

Thu, 06/14/2012 - 12:07 | 2525971 hotkarlandthecl...
hotkarlandtheclevelandsteamers's picture

nope reggie just been asking myself when google is going to sprout a 4 handle.

Thu, 06/14/2012 - 12:00 | 2525942 shovelhead
shovelhead's picture

I always enjoy reading Reggie because I learn so much in such a short space.

He's like SherlocK Holmes with a calculator. (I was going to go with Financial Proctologist but thought he might take umbrage at the idea of a gloved fist. Not quite as dashing an image as a fearless Zulu Warrior.)

Much of what he writes is far above my paygrade as a toe-dipper in the markets but it's good to get high octane info as to the nuts and bolts of this highly dysfuctional machine that is surrounded by smoke and mirrors.

Really good stuff for free. You just can't do better than that. Free drinks for Reggie at the ZH Lounge and Pole-Dance Revue.

Thu, 06/14/2012 - 12:18 | 2526009 Cortez the Killer
Cortez the Killer's picture

As awesome as the info and insights in Reg's column are, that's how bad his formatting sucks

C'mon Reg, hire someone to spruce up your shit.

Thu, 06/14/2012 - 12:55 | 2526179 BeetleBailey
BeetleBailey's picture

Agreed.

Reg; I have to cut and paste and blow shit up on Word to read it. Jesus man..my bi-focals are not good enough!

Thu, 06/14/2012 - 11:28 | 2525823 MGA_1
MGA_1's picture

Yes... we are beginning to real problems cropping up.  I think Europe will have to institute FDIC insurance or there banking system will sieze by the end of the year.

Thu, 06/14/2012 - 11:16 | 2525745 Grand Supercycle
Grand Supercycle's picture

Rally warning continues...

Despite the stockbears with their pre-election jitters, SPX choppy bullish daily & USDX bearish daily charts strengthen.

Significant equity / EURUSD upside & USDX retracement ahead.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Thu, 06/14/2012 - 10:40 | 2525568 CustomersMan
CustomersMan's picture

 

Just to cheer everyone up, I spotted this story:

 

    "Federal Reserve Directors' Banks and Businesses Took $4 Trillion in Bailouts: Report

'Inherent conflicts of interest' in 2008 bailout aftermath revealed

Published on Tuesday, June 12, 2012 by Common Dreams
- Common Dreams staff

A report released today by US Senator Bernie Sanders (I-Vt.) has revealed the names of 18 former and current directors from Federal Reserve Banks who directly benefited from financial bailouts after the 2008 crisis. The Reserve directors worked in banks and corporations that collectively received over $4 trillion in bailout money allocated by the Federal Reserve.

Essentially, action taken by the Federal Reserve overwhelmingly benefited directors of the Federal Reserve, above other beneficiaries. The report titled Jamie Dimon Is Not Alone names the top 18 Reserve directors including Jamie Dimon who received the largest Federal Reserve loans and other financial assistance during the crisis.

"This report reveals the inherent conflicts of interest that exist at the Federal Reserve. At a time when small businesses could not get affordable loans to create jobs, the Fed was providing trillions in secret loans to some of the largest banks and corporations in America that were well represented on the boards of the Federal Reserve Banks. These conflicts must end," Sanders said."

Thu, 06/14/2012 - 10:29 | 2525509 disabledvet
disabledvet's picture

Again and as I have been commenting going on 4 years now these are COUNTRY runs not runs on mere banks. This has already come to a "theater near you" in the good ol USA I might add. (San Jose CA comes to mind. So does New York City itself.) this is textbook Great Depression with capital now fleeing the Continent in search of a safe RETURN. Call it "the law of bad numbers" if you will but the bulk of this money has been headed straight for US equities going on three years.

Thu, 06/14/2012 - 10:01 | 2525393 Muppet Pimp
Muppet Pimp's picture

Thanks Reggie, it makes the post much better ;-)

Thu, 06/14/2012 - 10:13 | 2525442 Treeplanter
Treeplanter's picture

Reggie gets a gold star on his homework.

Thu, 06/14/2012 - 09:54 | 2525363 falak pema
falak pema's picture

RM : If NPA/GDP ratio  means "non performing assets"/GDP ratio,  then the french position seems safer than that of Britain. Am I wrong?

Thu, 06/14/2012 - 10:09 | 2525428 Reggie Middleton
Reggie Middleton's picture

No you're not, but the Brits have their own printing press, autonomy from the EU periphery and some pretty big guns. It's not an Apples to Apples comparison. With that being said, we haven't heard the end of British banking woes just yet.

Thu, 06/14/2012 - 10:38 | 2525556 falak pema
falak pema's picture

Add to that the US, and you have all the variety of apples, the euroapples, the britapples and the USD goldenapples, all related by fishy dishy derivative electronic rehypoth soup and  Irish counterparty risk. Will the doctor stay away or is it Cinderella's witch toxic apples we are dappling about in there?  

I guess with Greece this WE, we'll find out if there is grease to spin the financial wheels or not in Eurozone and beyond. 

Thu, 06/14/2012 - 09:49 | 2525338 Jolly.Roger
Jolly.Roger's picture

Reggie's posts are hard to read. 

Thu, 06/14/2012 - 13:40 | 2526340 JOYFUL
JOYFUL's picture

yur right...

"... a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable." 

the man summed up the entire situation which confronts the western world in one incredibly concise sentence....and did it for two years before the event.

Analysts, financial bloggers n paid by word pundits. eat yur heart out...u r all redundant now.

 

 

 

 

 

 

 

 

Thu, 06/14/2012 - 10:02 | 2525242 Element
Element's picture

heh ... been thinking come on Reggie ... let's have it!

 

"To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach"

But! ... if you have way too much debt, you borrow more! ... it helps GDP!!! ... sheesh! ... analysts! ... lol

You see, the lies work on everybody but your counterparties - who actually want to see cash!

Said this since mark-to-make-believe was instituted, the extend-'n-pretend game all stops when people don't get paid any more.  Even I could see this plain as day in the first half of 2009.  Those executive banksters knew it alright Reggie.  No way they didn't see this coming and ignore it.

 

Thu, 06/14/2012 - 09:24 | 2525215 Navymugsy
Navymugsy's picture

He's black????

Thu, 06/14/2012 - 09:22 | 2525204 SamuelMaverick
SamuelMaverick's picture

Too much information Reggie, my head is going to explode. 

Thu, 06/14/2012 - 09:15 | 2525179 mrktwtch2
mrktwtch2's picture

why isnt reggie on the today show or leno for this matter..he corrctly warned about this almost 3yrs ago..what nobody wants to hear the truth from black man??

Thu, 06/14/2012 - 10:29 | 2525508 darteaus
darteaus's picture

Nobody wants to hear the truth - period.

Thu, 06/14/2012 - 09:49 | 2525332 Element
Element's picture

Dude, Edward Harrison's all over the MSM ... Reggie's just too scarey to put on MSM TV.

Thu, 06/14/2012 - 09:41 | 2525290 KHarper
KHarper's picture

Because he has a brain?

Thu, 06/14/2012 - 09:56 | 2525367 falak pema
falak pema's picture

no, because he is a zulu warrior and the Squid don't like him !

 

Thu, 06/14/2012 - 09:40 | 2525287 Diogenes
Diogenes's picture

"nobody wants to hear the truth from black man??"

You got that right. That's how Obama got elected. He knows better than to tell the truth about anything.

They don't want to hear the truth from anybody. Look how they ran Ron Paul out of town. There are plenty of other examples.

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