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Follow Me As I Model The First Pan-European Bank Run In Damn Near Real Time

Submitted by Reggie Middleton on 09/21/2011 20:18 -0400

I urge everyone to get your respectve models (contingent upon your subscription level, ranging from free to institutional) from the post BoomBustBlog BNP Paribas "Run On The Bank" Models Are Available For Download and plug in your assumptions BEFORE Europe's Lehman Moment arrives - for if when it does, most nations will be powerless to do anything about it. "Why?" you ask! Well, as so adroitly articulated in Reinhart and Rogoff's "This Time Is Different: Eight Centuries of Financial Folly", for 800 years one of the primary reasons for the monumental structural indebtedness of nations is the bailing out of their respective financial systems. This massive debt then becomes too much to service, and then bang... Default! This time around, it really just may be different, though.

I say this because the developed nations of the world and their leading economic superpowers (EU/China/US) have either goosed their financial systems (China) or allowed them to leverage out of control, collapse, then bailed them out by breaking the taxpaying populace either now or by mortgaging their future (EU/US). The problem is that in each case of the "Kick the Can Triumvirate Three" [BBB trademark], none of the core, structural or even nominal banking problems have been rectified nor addressed, despite the fact that the massive depreciatng toxic assets, leveraged to the hilt and massively mispriced due to regulatory capture are growing in both threat and stature. For more on this topic, reference How Regulatory CaptureTurns Doo Doo Deadly and Lehman Brothers Dies While Getting Away Wiht Murder: Introducing Regulatory Capture.

In the US its the housing market's fall out, being fed by ever depreciating housing prices. For those with short memories, the housing prices that collapsed in 2008 that caused the crash are significantly higher than the housing prices now. If the banks were in trouble then, I query... What are they in now? See:

In the EU, it's the sovereing debt thingy (see my pan-European sovereign debt crisis series, which anticipated this from January of 2010). I haven't had the opportunity to address in complete detail what this sovereign debt crisis will do to European CRE yet, American 'Realist' Reggie Middleton Paints a Sombre Picture for European Real Estate Amid Fears of Stagflation

And as stated above, in China, it's massive NPAs being built up in an artificially goosed up banking system designed to hide and conceal the effects of economic slowdown under the auspices of expansionary growth, when in fact it is truly a debt fueled bubble, just like in the EU and the states. See Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes? and China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences).

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample outout from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

Bloomberg reports: Lloyd’s of London Pulls Euro Bank Deposits

Lloyd’s of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with,” Luke Savage, finance director of the world’s oldest insurance market, said today in a phone interview. “If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

European banks and their regulators are trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures. Siemens AG (SIE), European’s biggest engineering company, withdrew short-term deposits from Societe Generale SA, France’s second-largest bank, in July, a person with knowledge of the matter said yesterday.

Lloyd’s, which holds about a third of its 2.5 billion pounds ($3.9 billion) of central assets in cash, has stopped depositing money with some banks in Europe’s peripheral economies, Savage said, declining to name the countries or institutions.

Simply fuel to the fire... As excerpted from my bank run post yesterday: Most Headlines Now Show French Bank Run …

Siemens shelters up to €6bn at ECB: Siemens withdrew more than half-a-billion euros...matter told the Financial Times. In total, Siemens has parked between €4bn ($5.4bn) and...to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone... By Daniel Schäfer in London and Chris Bryant and Ralph Atkins in Frankfurt...

... 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!

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...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!

Make no mistake! And just for those who cannot catch the hint... Reuters reports:

Bank of China halts FX swaps with some European banks

The European banks include French lenders Societe Generale (SOGN.PA), Credit Agricole (CAGR.PA) and BNP Paribas (BNPP.PA), and Bank of China halted trading with them partly because of the downgrading from Moody's, the sources said.

Another Chinese bank said it had stopped trading yuan interest rate swaps with European banks.

The sources declined to be identified because they were not authorized to speak with the media.

Contacted about this move by the Chinese banks, spokespeople for Societe Generale, UBS and BNP Paribas declined comment. Credit Agricole was not reachable for comment.

One of the sources said that Bank of China's decision may apply across its branches, including the onshore foreign exchange market.

"Apart from spot trading, all swaps and forwards trading (with the European banks) have been stopped," one source who is familiar with the matter told Reuters.

A step by step tutorial on exactly how it will happen....

Again, I believe the next big thing, for when (not if, but when) European banks blow up, is the reverberation through American banks and how 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.

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Thu, 09/22/2011 - 09:58 | 1696723 homersimpson

The phrase comes to mind: "it ain't braggin if you can back it up."

Wed, 09/21/2011 - 23:24 | 1695585 Melin

I applaud Reggie's cockiness. He's battling the ignorant and the evil. He's a hero.

Thu, 09/22/2011 - 10:24 | 1696837 illyia

If TD had an award for it, Reggie might very well win Best in Show, with CD and GW taking silver and bronze in whatever order. Amazing content from all three - and we all profit from their thinking.

Thx Reggie. As usual.

Wed, 09/21/2011 - 23:46 | 1695629 Dick Fitz

A month or so ago, he apologized, here on ZH, for telling buyers some play was good- and then he said he was sorry if we lost money. He admitted to being WRONG! That deserves major respect.

That is a rare, and valuable commodity. I agree with his take on the bank runs- they will be institutional. It's just a matter of timing it right. I just hope he's right this time...

Thu, 09/22/2011 - 07:25 | 1696148 Ghordius

I forgot,

there was this quotation:

"Siemens withdrew more than half-a-billion euros...matter told the Financial Times. In total, Siemens has parked between €4bn ($5.4bn) and...to deposit cash directly with the ECB. Siemens’ move demonstrates the impact of the eurozone..."

This is not the "news" some media are trying to squeeze out of it. Bigger EU Companies in the automotive sector always had a financial branch - Siemens just remembered that they could use it. Call it an healthy adaptation to the current extremely low rates environment.

For me, it just shows that the ECB is serious in it's purpose, it might be seen as bearish for the financials but it is a possible way forward for the EuroZone.

Thu, 09/22/2011 - 07:18 | 1696133 Ghordius

Apologizing for being wrong? Priceless.

I agree on the possibility of a bank run - even though I have to point out that in the EU bank runs are managed differently. And the ECB would "accomodate". Remember that Europeans have fewer issues with nationalizations.

Where I don't agree with R is this "European Real Estate" crisis he is talking about if you follow the link - the real estate set-up in Europe is really too diverse to put it all in one bucket. Take Germany, for example, and have a look how few homeowners it has. Or take Italy, and look at how few mortgages are outstanding. His scheme applies only to a small part of the pie - which is already in trouble.

Wed, 09/21/2011 - 21:09 | 1695297 motley

Nice work as always Reggie. ECB appears to be in deep shit. I can feel the liquidity gears screeching to a halt...this time Euro style.

Thu, 09/22/2011 - 06:34 | 1696090 PY-129-20

Last time American style. This time Euro style. Next time Chinese Style.

Thu, 09/22/2011 - 10:03 | 1696740 falak pema

sounds like the guide Michelin!

Follow Me As I Model The First Pan-European Bank Run In Damn Near Real Time

Make no mistake - modern day bank runs are now caused by institutions!

Bank of China halts FX swaps with some European banks

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