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“A Trillion Here, A Trillion There...” – Why 90% Of The European Bank Sector’s Market Cap Is Vaporware*
Two weeks ago the BIS released the Basel Quantitative Impact Survey, "Results of the Basel, III monitoring exercise as of June 2011" which contained several very scary numbers that were noted in Zero Hedge yet which barely received any mention in the broader press. Because the numbers were all very, very large (think eyes glazing over 11-12 digits large), and because their existence meant that the long-term, chronic pain for Europe, which is and has been one of public (and selected private) sector deleveraging (which oddly enough is called “austerity” by everyone to no doubt habituate people to associate debt reduction with pain - where is "mean-reversionism" when you need it?), they, and the BIS report, were promptly buried under the dense foliage of the signal-to-noise forest. Yet it is numbers such as these, that provide us with the best possible glance at the entire forest, no matter how much the various global financial authorities enjoy inundating the hapless speculator crowd with endless irrelevant “trees” on a daily basis.
The numbers referred to are the BIS-suggested bank solvency deficiency to reach a viable capital level (not liquidity) explained as follows by UBS:
The QIS states that the June 2011 shortfall of common equity to a 7% common equity tier 1 ratio for major banks globally was €486 billion. We can estimate from this that the shortfall to a 10% common equity tier 1 is €1.02 trillion. Some years hence and before the mitigation that banks will undertake aggressively, but nevertheless, a trillion is a striking number.
UBS is perfectly happy to "go there":
A trillion here, a trillion there...
The QIS then goes on. The shortfall to the Liquidity Coverage Ratio is €1.8 trillion and 40% of banks have a LCR below 75%. And the shortfall to the Net Stable Funding Ratio is €2.9 trillion. A third of large banks would not meet the 3% tier one leverage ratio. These are gigantic figures relative to the size of the real economy.
Total bank debt issuance globally in the last 12 months was €1.1 trillion. That is, the shortfall in the Net Stable Funding Ratio is almost three year’s worth of issuance capacity.
In other words we not only finally have a problem quantified in terms of scale, but the scale happens to be very, very big:
These figures compare with global GDP of US$59 trillion (€45 trillion). In other words, the NSFR shortfall is equivalent to over 6% of global GDP. We would not regard this as insignificant.
One can just feel the smirk on the author's face as they added that last bit...
But forget global GDP - a number goosed by debt creation itself, and thus one which benefits from leverage, the very process the BIS is warning against. Far more disturbing is this number when juxtaposed in the context of the European financial segment, also the inspiration for our title:
For Europe specifically, a related EBA publication15 implies a €511 billion equity shortfall to a 10% common equity tier 1 ratio. This is 90% of the €565 billion in free float market capitalisation of the European bank sector. The Basel III leverage ratio of large banks as of June 2011 would have been a measly 2.7%; the LCR just 71%, representing a shortfall of €1.2 trillion; the NSFR shortfall is €1.9 trillion. Total European bank debt issuance over the last 12 months has been less than €600 billion.
In simple terms, virtually the entire equity buffer of the European financial system, or 90% to be exact, would be wiped out if instead of focusing on maxing out risk returns by unsustainable leverage, Europe’s banks were to actually seek to transform into viable, stable entities, in the process marking their massively mismarked asset base to market. Something tells us that the equity tranche in Europe, and elsewhere, would be rather averse this dramatic writedown in valuation merely for the sake of avoiding future taxpayer bailouts. After all that’s what naïve, stupid, $0.99 cent iApp-fascinated taxpayers are there for: to be abused.
In other words, thanks BIS but your math is not welcome here. The can will promptly be kicked down the road or else.
Yet what is most troubling is that there appear to be no way out for European banks, in other words not even the status quo’s favorite pastime – can kicking – is very sustainable at this point:
Returns on banking are now quite inadequate to attract significant fresh equity into the sector. The regulatory agenda means that there is likely to be little confidence in this changing over the next several years. Banks must therefore turn to the state for their incremental capital or seek to shrink their profile into the amount of stable funding and equity they presently have. Deleveraging is alive and well and living in the euro area.
And just a tangent, the BIS data and analysis was of June 30. That's before all the fun in Europe really started.
Needless to say, raising $2+ trillion in new capital over the next 5 years will be next to impossible as European banks are hardly what one would call profitable (implying retained earnings as a source of capital is nothing but a cruel joke; now as for retained losses...), and as we saw when UniCredit tried to raise some equity in the open market only to see its stock get annihilated in January, pitching capital raises through equity issuance to Euro fins is the surest way for any investment banker to get sacked.
Which means one thing: as markets get progressively smarter (yes, it will take a while) that there is a difference between capital and liquidity, and demand it from banks that otherwise risk a Lehman-like fate, the asset dispositions, i.e., sales of the blue-light special variety, are about to kick into high gear. Here, while for every buyer there may be a seller, when faced with a known onslaught of about $2.9 trillion in asset sales over a period of time, one thing is certain: it will be a mecca of a buyer’s market as liquidations become wholesale and prices across most asset classes tumble as a result.
And as noted in the post just prior, courtesy of Europe’s Dead Bank Walking list, the market will know just where to go first (and second, and third, etc) for the biggest liquidation deals once the “For Sale” signs are posted.
* Vaporware in a Jon Corzine sense, circa November-December 2011; not in the context of Duke Nukem
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Hiroshima the banks and lets start from there! All major banks, one shot, no prisoners. Now that is something worth dreaming about. Better still get them to Hiroshima themselves!
If you find yourself in a hole , keep digging trenches and by all means start a war !
In The Know: Should The Government Stop Dumping Money Into A Giant Hole?
http://www.youtube.com/watch?v=JnX-D4kkPOQ
it has been a LONGGGGG Time since this made the rounds.. it seems like it is time for it to make the rounds again!
“If you love America, you throw money in its hole”
I just love Maxine Waters.
...whole lotta hole going on. http://www.youtube.com/watch?v=Xw2MjRcVO4g
they don't make'em like this anymore..
http://www.youtube.com/watch?v=sdXjm8pZMws
Liquidity: the state preceding vaporization
+1
LCR for Basel III is 30 net funding??? Common equity ratio is 4.5% (7% in 2019.....) and where does that 10% Tier 1 ratio come from??
tis this a "What if Basel III had the following ratios" article, someone jerking off with computer simulations ove t weekend coz (s)he didnt have anythin better to do?
I dont Recognize Basel III numbers in there
but then again im no bankster......
I've fallen, and I can't get up!
Reading hard core stuff like this is demanding and takes a lot of effort to understand the complexity involved. With this in mind everybody who's reading this and trying hard to understand the message, deserves a special prize. And i just happen to have just the perfect light weight comedian here via FT. Laugh, relax and enjoy!
http://www.ft.com/intl/cms/s/2/dbb65da8-9062-11e1-8adc-00144feab49a.html...
LOLrrry Stunners! Oh, I love a good laugh.
EDIT: I wonder if slick larry actually gets paid to blowhard on the FT or if they just let him do his little op-ed's for the lulz. Same for Paul Kruegerman/NYT.
It's for the lulz no doubt!
“Its financial problems stem from lack of growth.”
Wow.. enlightening.
Like, if Spain had just invested heavily in something like housing or solar or something they could have grown beyond their tendency to spend more than they earn.
LS is an idiot propped-up and endeared by Washington cronies only because it suits the lies and garbage they're peddling!
Q: how do you get growth in a depressed macro economy with leveraged sovereign debt?
A: inflate
Q: how do you inflate when everyone thinks its a reasonable chance it'll happen?
A: i) deny you will inflate then do it anyway
A: ii) convince the masses they are observing growth
Q: How do you inflate your fiat without risking run away inflation?
A: buy gold in case you have to peg
How come the govs talk about "fiscal austerity" while the central banks print under the guise of preserving liquidity?
I think that perhaps the diagnosis is correct but the prescription is misguided. Growth might help, but as long as politicians exist they will pass laws to ostensibly "make things better" and effecitively make things worse. Perhaps we should promise elected officials a bonus as long as they promise not to do anything.
I was also amazed at this statement from the link: "In any financial situation where interest rates far exceed growth rates, debt problems spiral out of control." Since the debt problems in the US are spiraling out of control at every level from the individual up to the Federal government, can we assume the inverse is also true and therefore infer that our interest rates - barely above zero - exceed our growth rate?
I think this commentator deserves some kind of Nobel Prize:
"Ok, let's spend more and restore growth. If leaders would start talking about the architecture of this solution it would develop broader credibility with the public. How do we spend more? By borrowing. Fine, next question, what do we spend it on? At this juncture, borrowing at the supra-national level (at the euro zone level) is quite feasible at affordable rates. Let's say the overall European situation is a deficiency in demand that can be remedied by counter-cyclical spending. In short, borrow at the euro zone level and spend locally.
So announce a multi-trillion euro borrowing program over multiple years to fund a broad-based infrastructure and housing construction program across Europe with an emphasis on putting spending where the deficiency in demand is, where workers need to be reemployed. A focus should be spending that improves a local economy's productivity. You have to go somewhere! The euro zone spending authority doing this could get in return implemented changes in labor regulations and removal of other structural artifacts hurting growth in return for the commitment of new funds. Very Pavlovian: a national government passes the legislation (rings the bell), the euro money is on its way (the cheese).
A good design of a borrowing and spending program should result in good outcomes. Right now, there's too much paper, not enough concrete in Europe's plans.
How you spend the money counts! A good plan most likely will garner upfront political support from the affected people.
Mr Summers correctly summarizes the way forward: a common European commitment to growth."
so if you max out your credit card and can't make the minimum payment, you should open another account? brilliant!!!
Returns on banking are now quite inadequate to attract significant fresh equity into the sector
Lloyds hasn't paid a dividend since 2008. Its Share Price was kept high simply because of its Dividend and Hampson resigned as CGOO when he wanted to cut the Dividend long before 2007......funnily enough he ended up at UKFI running the nationalised Lloyds and RBS. If you don't pay Dividends your Share Price tanks in a cash-generative business and banks pay too much in bOnuses and Salary to pay Dividends.
The Employees take the Dividends before the Shareholders get to see Retained Earnings - the Rewards To RISK are paltry compared to rewards to those who CREATE Risk ie Staff
If a country collapses and is not reported, does it still collapse?
It will probably be called a failed state and get democratized. Sporty crusades of today.
That is exactly how powerful they think they are. They think the country can collapse, and they can redefine reality with printed dollars, TV hack commentary, and the like.
Today on CNN, they were pushing a case that austerity is a loser for the world....we are so far from the right course I do not know if we can course correct. Like trying to land a 747 from 3,000 ft up, and you are already over the runway.
Ladies and gentlemen, this is Captain RuPaul speaking..
Like trying to land a 747 from 3,000 ft up, and you are already over the runway.
*******************************************
One standard 3 degree/sec turn and a 1,500 ft/min descent will work in that situation. Unfortunately that doesn't work in economics ... we will crash and burn when the masses open their eyes and realize the emporer has no clothes.
so, we've got the euro banks blowing up, the euro states imploding for to much debt and no growth, throw in japan and south korea, a hard landing in china, cracks in the petrodollar/reserve curency system add a little splash of middle east tension and what do you get??
You get another season of American idol and reruns of Housewives
At least Kim Kardashian got invited to the white house.........i feel better about our country already!!
"... it will be a mecca of a buyer’s market as liquidations become wholesale and prices across most asset classes tumble as a result. ..."
and that my friends should be a day of jubilation for it means that the cancer is being purged....hopefully it will be accompanied by mass prosecutions of greedy and incompetent banksters...
Buyers market with what fungible currency? They are destroying savings. You have to pay cap gains and sales tax on gold and silver. Barter is a sloppy economic transaction.
Vaporware? Yeah, I'm pretty sure Corzine is in charge of selling that shit.
Makes whatever you put in it spoil in record time, and disappear when you try to open the container.
Difference between capital and liquidity? If central banks couldn't call unearned tax revenues of infinite amounts capital, then there might be a difference. For the FED and ECB, "Ctrl-P" is both capital and liquidity.
hey, eb!
vaporWear is the female equivalent of my favorite fragrance: cannabisForMen
I guess I see new acronyms coming (Europe’s Dead Bank Walking list) EDBW
.......................................................(US Dead Bank Walking list) USDBW
The fact that no bank is profitable by simply doing banking business without playing hedge fund shows that our entire economy is just a mirage.
Rule one : as long as banks return a 10% div. , gold will stay low.
Rule 2 : if banks don't return a 10% div., the risk is way to high to own their stock.
People still believe in a new bubble. People believe the bubble is normal and will soon come back. Stock should go back to their all time highs because they once where so high. Even without the returns.
It won't. And that's why one day, the market will crash untill we see 10% return on shares.
Hang on for the ride. It still needs to start.
It's now a high-wire act to justify the existence of an empire of nothing, lead by an emperor with invisible new clothes. If the world lost all of its virtual beans (all of the 1s and 0s contained in the server in the basement of the Fed), if they all vaporized overnight, then what are the consequences really? A headache for a day or a month? The truth that they don't want us to know is that if all of that virtual money disappeared overnight, the world would wake up refreshed and ready for a brand new day without shackles. It would all vanish into the annals of very obscure and marginal history like a bad dream that is quickly forgotten as people move on.
It disappeared overnight because it was never there.
'empire of nothing'.........you are correct.
what did we get from this taxpayer funded empire? $100 Trillion of debt? The whole fricken world hates us, our infrastructure is 3rd world at best and our kids cant read or write and all so that oil can be sold in dollars.............WTF
@dick: the empire is now an empty shell. The real action has moved elsewhere. Now they're selling off the family silver in exchange for another week of gas to fill the Escalade. Unfortunately we all plebes are gonna have to sell blood for it soon enough. When things become so dysfunctional that the only coping mechanism is denial and sticking heads in the sand that means that the good old days are numbered.
The good old days are over, wouldn't you say? No doubt the banking sector is useful, but at this point it has grown out of all proportion. At least when gold and silver were real money, when TPTB were inflating you could still tell by how much. Now the bubble has grown so much it is in different dimensions altogether.
Why oh why do they keep playing this game? Its like handless children dribbling a basketball.
At first it looks kinda funny...and then you realize...its very sad.
I put together charts for Congress showing that almost every country is deflating in housing. Almost all of Europe is deflating which is death for Eurobanks.
And look at Portugal's house prices. Jesu y Maria!!!!!!!!!!!!!!!!
http://confoundedinterest.wordpress.com/2012/04/29/scorcher-vi-global-meltdown-of-housing-prices-u-s-canada-japan-uk-france-denmark-australia-italy-portugal-and-spain/
Not subtle at all. The bubble has burst. It's a long painful slide. But it's only being made worse by the insistence by central bankers on "Reflation", which has translated into inflation for needed commodities and the general cost of home ownership, cost of living and doing business.
Avoiding the reset will only make the outcome even more painful as every anachronism is kept alive, sucking the living marrow out of productive enterprise.
Burn Baby Burn Eurotrash Inferno. It's party time in the EU.
Nice link but old news aye?
Report: NYC health department takes aim at happy hour
http://bottomline.msnbc.msn.com/_news/2012/04/29/11460356-report-nyc-hea...
Fucking health fascists.
It's as though the US is trying to financially collapse Europe - first with the mortgages - like they financially collapsed the Soviet Union in the 1980s.
A world without the UN.....hmmm....sounds good to me.
Will a PetroYuan work?..........probably not.......so the euro has to go, lest it compete with the Dollar
Meanwhile, back at the ranch grandma was beating-off the Indians:
... and the hard landing continues in China .... 2012.04.29, Pingtung County, Lin Feng, Po Heung cultural quarter free-style rehearsal:
http://www.youtube.com/watch?v=TG_lzsezoVU
where's the gold?
http://www.one-evil.org/acts_global_depression/acts_global_depression.htm
Ps. i find this article alittle over-the-top, but very, very interesting, considering the last entity one would actually suspect?
jmo
Check out the spike on the kitco gold chart, oh and the matching one on the silver chart....wtf!
I returned to ZH to see if there are comments on that.
Looks like a poorly configured rules-based buy/sell strategy. But what do I know...
I wonder what was volume at the time. Probably low.
Silver is up over $1 in opening hours, and it shoots right back down to earth. Huh?
Blythe Masters at JPM Chase controls the price of silver.
She keeps the price down. It is a manipulated market, until someone with $20Billion takes her out.
Have a listen at our new financial Radio Show exposing the rotten corruption of our financial system!
http://stocklegends.com/episode-11-market-update/
Hosts:
QuickDraw ~ Matt_Chart
Topics:
Black Friday Violence
MF Global ~ What does this mean for you?
Britain ~ Publicly warns people of looming collapse
Venezuela Forces Physical Delivery of gold
International Currency Wars
Russia beefs up Gold Reserves Huge In Oct
Goldman Explains What Super Committee Failure Means
"Vaporware in a Jon Corzine sense, circa November-December 2011; not in the context of Duke Nukem".
That's what I love about this site - posts can refer to Socrates one minute and then Duke Nukem the next - brilliant!
DavidC