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European Banks Find Depositor-Of-Last-Resort. For Now!

Submitted by Tyler Durden on 11/18/2011 00:37 -0400

We have highlighted the crisis-level situation that short-term liquidity markets find themselves in across Europe at length with banks using every gimmick and instrument they can in order to avoid transparency and insolvency. Whether it's cross-currency basis swaps, FRA/OIS spreads, or simply ECB emergency funds and Fed swap lines, its clear they are running out of 'lenders'. With the interbank repo market as good as closed to most of the Italian banking system, NY Times DealBook has discovered an unusual source of funding via the London Stock Exchange's Italian clearinghouse Cassa Di Compensazione E Garanzia SpA (CC&G). Acting as the middle-man for short-term (3-day) collateralized loans, CC&G basically acts as a depositor for the Italian banks (which make up more than half the 15 European financials that are using this source). While arguably they are not explicitly lending money, merely term-depositing cash, the distinction provides cover in the case of a credit event but there is still (obviously) significant risk of loss given the forms of collateral and potential rapidity of cash-calls.

NY Times DealBook: Banks in Italy Find an Unusual Liquidity Lifeline

The London Stock Exchange is becoming the lender of last resort for many banks in Italy as concerns over the country’s debt levels squeeze liquidity out of the Italian financial market.

With cash increasingly hard to come by, Italy’s banks are turning to CC&G, the exchange’s Italian clearinghouse, for short-term lending. That includes some of the country’s largest financial institutions, including Unicredit and Mediobanca, according to a person close to the situation.

While just two banks received short-term capital from CC&G in 2009, that number has now risen to 15 — half of them Italian and the rest European financial institutions that trade in the country.

Under terms of the deals, the clearinghouse, which acts as a middleman to guarantee trades between financial parties, is offering money to both Italian and European banks with a presence in Italy for up to three days.

The money, which comes from collateral that traders must put up to complete financial transactions, is deposited with the banks to cover shortfalls in liquidity. CC&G earns a profit by charging banks interest on the money that they borrow.

Previously, banks had used the so-called repo market, where banks lend capital to each other on a short-term basis, to meet their financing requirements. But fears about Italy’s ability to repay its debts has pushed up borrowing costs and reduced the ability of banks to access that market.

A spokesman for the exchange said the company was in close discussions with the Italian central bank about any potential problems in the country’s financial sector, and used stringent risk management to decide whether to give banks access to capital.

CC&G also doesn’t technically lend money to banks, but instead deposits the cash with them on a short-term basis. Under Italian law, this distinction makes CC&G a depositor with the banks, and places it ahead of other creditors looking to get their money back if any financial institution should fail.

The legal distinction may still leave CC&G exposed if a lender defaults. And analysts question the sustainability of lending to struggling banks. That’s particularly true as the collateral offered to institutions as short-term financing is often provided by the same bank’s separate trading operations.

Paul Rowady, senior analyst at financial consultancy TABB Group in Chicago, said the global squeeze on liquidity was forcing institutions to look elsewhere, including to clearinghouses, to meet their short-term financing commitments.

He added that central clearing parties might feel secure in lending to banks because it was on a short-term basis and they were eager for extra revenue.

“Financial entities are making money in new and different ways,” he said. “Just because times are bad doesn’t mean they’re not looking for profits.”

And Italy’s turmoil has been good business for the London Stock Exchange. According to the exchange, CC&G reported a 209 percent jump in income to £54.3 million, or $83.6 million, during the first half of the year, compared with the same period in 2010.

The Italian business now represents 14 percent of the exchange’s overall income, compared with just 5 percent in the first half of 2010.

In our ever-so-humble opinion, this should be added near the top of the list of crisis canaries-in-the-coal-mine as the cracks of desperation appear more and more across the largest and most-levered financial firms in the world.

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Fri, 11/18/2011 - 00:43 | 1890334 Bumblebee Tuna

Every time a banker masturbates, a canary dies?

Fri, 11/18/2011 - 01:11 | 1890400 Urban Roman

Don't know about the canary, but the sperm bank is full of IOUs after.

Fri, 11/18/2011 - 02:51 | 1890538 Michael

You notice CNBC has fewer commercial sponsors so they fill their commercial space promoting themselves? It's so pathetic.

Fri, 11/18/2011 - 07:32 | 1890711 dlmaniac

"Bank-run Forrest bank-run!!"

Fri, 11/18/2011 - 00:55 | 1890337 DormRoom

There are two stark choices for world government: coordination or collapse.

Coordination will lead ot huge income inequalities, as monetary stimulus erode savings from very low real interest rates, devalue currency, and raise prices via a commodities bubble (high-hyper inflation). Thus we will enter a new normal of social unrest.

Collapses are inherently unstable, and unknowable. Thus the power elite can not be assured continuity. So they favor coordinaation.

Germany is reticient on coordination, because they've have been on the losing end of it (after Paris 1919). And there's a latent tendency of domination within German culture (yes--huge generalization==I know_. So futrher inequalities will ultimately lead one German group to dominate all others, leading once again to extreme nationalism.

But as Hayek feared, coordination to 'solve' this crisis must be global. Thus we head down a path towards ogliarchial collectivism, as all modalities in the global economy must be'coordinated', but in reality controlled, and manipulated. Thus we lose the possiblity of creative destruction inherent in capitalism.

As we have seen from the EU, democratic processes have been eliminated (Greek referendum & Italian elections) in favor of coordination. So democracy is at risk for all.

Fri, 11/18/2011 - 00:56 | 1890366 seek

Given all the things coordination leads to, it's simply a deferrment of collapse. Which is what they've been trying for three years -- but it's getting to the point where they know it's inevitable, and the stronger players are wavering in their choice to cooperate or defect.

Once one major player, and I would gues it is Germany, defects, it's game over. Things will move with very high speed.

I can't but wonder if we're close to the tipping point for real this time. I don't see the obvious 11th hour save, other than Ben printing, which won't help for long.

Maybe it's a headfake like 2008, where they let it get scary enough to justify the next massive intervention?

The timing sucks no one is going to be around to help in the US next week.

Fri, 11/18/2011 - 01:05 | 1890379 DormRoom

you underestimate the power of the ogligarchs. Collapse risks the continuity of their power. The Lehman collapse was a surprise. But they know what is at stake in a systemic collapse. And they will ensure monetization.

continuity of power is the end. Coordination benefits them, since future inequalities from monetizaiton is biased towards property owners, and consolidates their power.

Fri, 11/18/2011 - 01:12 | 1890402 LynRobison

Order from chaos, that is what the oligarchs will promise. They will deliver order, at the cost of freedom and democracy.

Fri, 11/18/2011 - 01:00 | 1890378 wandstrasse

we are all brothers and sisters in debt. Germany just represents the last top cards on the house of cards. We still can easiliy raise new debt to pay for existing debt - and everybody reads this fact as proof for a 'sound economy'. But Germany is just on top of the house of cards. Deeper to fall. Nationalism, totalitarianism, facism, communism, anarchy, war... and all other ugly options to come/to be enforced will be the same all over the world.

Fri, 11/18/2011 - 00:45 | 1890338 Chuck Bone

So what happens if like MF Global the banks lie and take the money and die and people have cash with the LSE to meet margin and that cash is now gone?

Fri, 11/18/2011 - 00:46 | 1890341 devo

3 day loan? Sounds like a pawn shop.

Ouch.

Fri, 11/18/2011 - 00:59 | 1890373 tekhneek

Tsk tsk.

It's not a loan! it's a short-term deposit.

Fri, 11/18/2011 - 01:18 | 1890414 Unprepared

Deposits sounds unharmful. Why don't we call a spade a spade. It's an overnight repo.

Fri, 11/18/2011 - 04:54 | 1890604 Gief Gold Plox

If it's technically a deposit, and with the fractional reserve system in place, doesn't that in affect allow the bank to significantly expand their books on the basis of said deposit, or are these deposits treated differently?

Fri, 11/18/2011 - 07:17 | 1890692 DosZap

Gief Gold Plox ,

If it's like ours 10-1.........................(or used to be).

Fri, 11/18/2011 - 00:45 | 1890343 WonderDawg

Lending margin collateral to Italian banks. Sounds kind of MF Globalesque.

Fri, 11/18/2011 - 00:48 | 1890346 ZippyBananaPants

Tebow time!!

Fri, 11/18/2011 - 00:48 | 1890347 Sockeye

This is like being the banker in monopoly and "borrowing" a little bit here and there from the bank, when the cash flow was down a bit. Usually ended with my little brother flipping the whole board over storming off and my mom getting super mad.

Fri, 11/18/2011 - 01:12 | 1890403 wandstrasse

just this time there are ONLY bankers at the table, all others must humbly watch.

Fri, 11/18/2011 - 00:48 | 1890348 Sockeye

Fri, 11/18/2011 - 00:58 | 1890361 tekhneek

CC&G also doesn’t technically lend money to banks, but instead deposits the cash with them on a short-term basis

Ok...

CC&G earns a profit by charging banks interest on the money that they borrow.

Ahhh... Now it makes sense....

Let's get this straight. I'm not lending you money. I'm going to "deposit" it in your account for 3 days. Just pay me back the deposit + 1% and we're straight. Don't worry... you're not borrowing it. I'm just depositing it.

Please tell me it gets crazier.

Fri, 11/18/2011 - 01:15 | 1890406 Scalaris

Completely normal fringe science banking.

Fri, 11/18/2011 - 06:39 | 1890662 sumo

There is nothing wrong with your brokerage account. Do not attempt to adjust your balance. We are controlling the positions. If we wish to make them longer, we will reduce the margins. If we wish to make it shorter, we will tune it till you whimper. We will control the cash. We will control the yields. We can HFT the data, make it flutter. We can change the news flow to a soft blur or sharpen it to crystal clarity. For the next trading session, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your brokerage account. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner Federal Reserve to... The Outer Limits.

Fri, 11/18/2011 - 08:39 | 1890779 JungleJim

"It depends on what your definition of "is" is ...."

Fri, 11/18/2011 - 01:17 | 1890382 chump666

yeah i heard about that the LSE was funding bank shortfalls.

anyways...Europe time for some Slayer http://www.youtube.com/watch?v=rvuO2EvCTAE

yeah you know it, Seasons in the Abyss...

Fri, 11/18/2011 - 01:16 | 1890410 Eireann go Brach

It would be such a Shame if some of these bankers were thrown out the window of the fourteenth floor at their bank tomorrow!

Fri, 11/18/2011 - 01:26 | 1890433 Caviar Emptor

We're seeing fragmentation. What once was a unified block of faithful bankers and docile politicians is breaking down. And unlike 08, there are risks percieved to too much printing and bailouts. There are now both economic and political risks. So answers are less clear. Self-interest in emerging differently in different countries. Harsh realities are catching up. This was no garden variety real estate bust and banking crisis like we've had following each GOP administration since the 1970s.

Fri, 11/18/2011 - 01:27 | 1890434 lolmao500

You are kidding yourself if you think it's only MF Global or the LSE for that matter. I bet all big banks and even smaller ones and credit unions are doing this. Loaning your 401k, IRA, deposit money... everything they've got, loaning it short term MF style.

Of course all of that is all fine, until it is not.

Fri, 11/18/2011 - 01:32 | 1890441 YesWeKahn

You have to try really hard to find something that can save euro zone. This is really not a good sign.

Fri, 11/18/2011 - 01:56 | 1890478 Mark123

I thought the banks could get unlimited funds from the ECB using any old crappy collateral? I don't understand??

Fri, 11/18/2011 - 02:17 | 1890501 SunBlaster

All this BULL of not having money. When you know that KRUPP family had 30trillion in only one of their accounts in 1900s you realize that those with real money are just waiting for sovereigns to hand over their gold and future earnings of the citizens and their children. Plus they will buy all these failed banks and their assest @ fire sale prices.

This whole one world government thing is making me sick, maybe I'll go throw up at some bankster and post the video on Youtube!

THANK YOU ZH for informing those who will listen.

Fri, 11/18/2011 - 05:08 | 1890614 supermaxedout

What 30 trillion ? Zimbabwe Dollars ?.

The Krupps were rich by no doubt enormous rich. Their high profit product in peace time were railway wheels. They had the world patent for seaminglees railway wheels. All of the US railways and the rest of the world bought it at Krupps price. Do not forget why WWI was fought. To stop the rise of Germany having at that time more peole than the US. Around 1900 Germany had 120 Million inhabitants now only 80 Million left. German products dominated the maarkets much more then now. Remember, Merck, Pfizer, Bayer and many other companies which are till now of great importance for the US were originallly affiliates from German companies or like Pfizer were founded by German chemists with the knowhow and the connections from their homeland. Dow Chemicals was somehow different but they cooperated very closely from their beginning with BASF which was dominating the chemical industry for 40 years already when Dow started. Dow got the know how for the petro chemistry from BASF and the cooperation between these companies never stopped really despite the wars.

Fri, 11/18/2011 - 02:17 | 1890512 Mark123

So in 2008 the world bankers transferred all their crap to the taxpayers (AND SINCE IT IS NOW A GOVERNMENT PROBLEM NO NEED TO WRITE ANY OF IT DOWN), and then were allowed to come up with their own crazy models to value the crap they kept on their books. We never found out what they had in off balance sheet vehicles....God only knows what that stuff is, but my simple guess is that if they don't want people to see it on their books it is totally dangerous crap....and it is still out there.

Then all governments spent like mad and increased lending to keep the economy looking good. This was the solution - no write-offs, and increase government spending and debt. Nobody was punished, in fact the criminals were continued to be rewarded handsomely.

WE FIXED NOTHING AND EVEN MADE THINGS WORSE.

Now things are starting to fall apart again. The only solution I hear now is for the central banks to print (increase debt)...when will the ECB start to really go nuts? That is the solution....and the world is still running around pretending there were no bad loans made, no wasteful investments, no commitments made that we could not afford, no criminals running the financial system etc etc....everything is fine and all we need is confidence and we can continue on forever in la la land.

Somehow, people have accepted that we cannot let any of the big banks fail - because that would be the end of the world. Well, if it was me I would arrest every last one of the banks directors, wipe out the shareholders and bondholders, re-instate glass-steagall, put the banks in receivership and break them up into smaller units and reduce the size of government by, oh at least 50% and eliminate the Federal Reserve (with an extensive audit to boot).

Sad thing is, someone will do this (and much more) eventually, but it will be a dictator of sorts and will be the end of a wonderful experiment in personal liberty.

Fri, 11/18/2011 - 02:20 | 1890515 upb