After Cyprus, Who Is Next?
Short answer: we don't know.
We do, however, know something we have been pointing out since early 2012 - when it comes to the funding structure of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans.
Extending the above to cover the entire US financial system, shows more of the same: according to the Fed, in the latest week ended March 6, there was a total of $9,283 billion in consolidated deposits, covering just $7,255 billion in commercial bank loans, a record $2+ trillion in excess deposits over loans.
How is it possible that there is a record amount of deposits in the US financial system, while the notional outstanding of total commercial loans is less than at the time Lehman filed? Simple - the delta has been filled by the Fed's excess reserves, which amounts to... drumroll... just over $2 trillion, which via circuitous ways make its way back to the bank deposit ledger - this was explained in "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed."
In other words, by becoming America's indirect "bad bank", the Fed has mitigated the concern of a deposit run, or at least within the US traditional banking system, however in the process making the US $14 trillion shadow banking system (where it was been soaking up safe collateral at an epic pace) breathtakingly fragile.
However, shadow banking is a topic for another day. For the time being, the take home message is that at least superficially, there is a record $2 trillion in deposits which are not encumbered by loans, and which incidentally are used by banks such as JPM to fund the operations of its prop trading desks, such as the CIO, and ramp stocks and risk in general, higher (as also explained previously) at least until these investments go horribly wrong and we get the usual theater of Senatorial hearings and the like.
So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago, in "A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming)."
Sure enough LTRO 3 didn't come (for the reasons we explained), and a year after the above post was penned, nothing has still changed in Europe, as Cyprus' bank depositors just learned to their humiliation and savings losses.
What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits. This goes back to centuries of capital formation in Europe, which unlike the US has always relied far more on secured bank loans than on unsecured corporate debt as can be seen on the chart below.
One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.
This happened in Cyprus overnight, where the non-performing asset side of the consolidated bank balance sheet was just forced to collapse to allow the continued operation of the country's financial system, however with a far smaller corporate bond and loan liability matching (there was only €2 billion in bond outstanding in Cyprus which made any realistic bail-in impossible) the only way to shrink the liabilities of the consolidated balance sheet - inevitable when one is terminally impairing assets - was to impair the most sacrosanct of bank liabilities - deposits.
This is precisely what just happened. The reason it happened first in Cyprus was for two reasons: i) the primary bank liability was deposits, and ii) a key source of deposit funding was those "evil" oligarch Russians: after all they deserve to be taught a lesson, or so the populist thinking in Germany and the Netherlands goes. Well, that may be the case, but at least half of the impaired deposits ended up belonging to the local population, which was neither oligarchic, nor "evil", not stole (allegedly) to make their money.
Of course, those who had read Zero Hedge a year ago would have known all about this. This is what we said in March of 2012:
The chart below explains why not only is Europe's severely asset constrained, it is also running out of funding, in the form of depositor cash: the most critical bank liability. Remember: without incremental deposits, banks can not invest in new assets, unless they generate cash from operations, and thus grow shareholder equity. There is a problem: as the final chart below shows, Europe, and especially Scandinavia which has consistently remained off the radar, is literally off the charts when it comes to LTD ratios.
With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.
One year after we warned Europe that it was only a matter of time before deposits become impaired to "grow into" the European bank balance sheet, Cyprus has drawn the short stick.
And yes: we don't know who will be next, but we do know that nothing has changed in the one year since we wrote our warning a year ago (because guarantees - not actions - of unlimited funding by the ECB not only do not help the actual underlying problems, they exacerbate them) and the last thing we want is to be accused by Europe of spreading the evil truth. But we do know that the unprecedented asset-liability mismatch in Europe is very unsustainable, and the lower the funding deposits in a given bank, the greater the eagerness will by management, regulators and politicians to impair, and confiscate said deposits, allowing a parallel collapse in bad assets and a gradual progression to a viable banking system. The only problem is said viability will be on the backs of savers and depositors once more who will have no choice but to lose much more than just 9.9% of their savings before it is all said and done.
So for those who really want to know who is next - look to the left side of the chart above: that's where the loan-to-deposit ratio among European banks is highest, and thus most unsustainable.
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