First it was US money markets; then it was various European industrial concerns (which somehow double down as banks); then it was China; now the bank runs shift to insurance institutions when, as Bloomberg reports, Lloyd's of London has decided to pull peripheral Euro bank deposits. What next: complete collapse of European interbank market as bank runs become a daily thing at both the retail and institutional level? Well, we already anticipated that. But it is something totally different to see it happen in practice.
From Bloomberg: "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.” 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. “We have a very conservatively positioned balance sheet,” Savage said. Lloyd’s also holds about a third of its assets in mainly U.S. and U.K. government bonds and a third in corporate bonds, he said." As usual, the biggest threat for European banks are not short sellers, not even naked CDS traders: it is precisely this - a deposit run, which saps the liquidity lifeblood out of any bank, hence making its collapse a matter of time.
Lloyd’s, founded in a London coffee house in 1688, swung to a 697 million-pound pretax loss in the six months to June 30 after the most expensive first half for natural disasters on record. The market made a profit of 628 million pounds in the same period a year earlier, the London-based market said in a statement today.
“These are tough times for the insurance industry, but we are well positioned to handle them,” Chief Executive Officer Richard Ward said in the statement. “While interest rates are low and equity markets are volatile, we can’t rely on investment income to subsidize our underwriting. We must decline under- priced risks.”
Insurers’ profits have been hurt by natural catastrophes, including the earthquake and tsunami that struck Japan in March, causing record insured losses of $70 billion in the first half of the year, according to broker Guy Carpenter & Co. At the same time, record low interest rates are crimping investment returns.
The insurance markets made 548 million pounds on its investments in the period, 8.2 percent lower than in the first half of 2010 as interest rates in the U.K., U.S. and the euro zone neared record lows.
“I cannot see any reasonable prospect of making decent investment income in the medium term,” Savage said.
Lloyd’s had a combined ratio of 113.3 percent in the first half, meaning for every pound it took in premiums, it paid out 1.13 pounds in claims. That worsened from 98.7 percent in the first half of 2010.
Look for a flurry of refutations from Europe which seeks to damage control this latest fact as rumor and innuendo.