Back in April 2012, Zero Hedge pointed out something rather disturbing for the European banking sector and defenders of the European monetary myth: the "aggregate shortfall of required stable funding Is €2.78 trillion [12]" which was the number estimated by the BIS' Basel III rules needed to return to some semblance of balance sheet stability in Europe. More importantly, this was a number so big, it was obvious that there was only one way to deal with it: cover it up deeply under the rug and pray it never reemerged.
What happened next was inevitable: Basel III's implementation was delayed as there was no way Europe's banks could satisfy their deleveraging requirements, while the actual capital shortfall hole became bigger and bigger. Today, 16 months later, the FT discovers what Zero Hedge readers knew long ago in "Eurozone banks need to shed €3.2tn in assets to meet Basel III [13]." In other words, not only has Europe not fixed anything in the past year, but the liquidity tsunami injected by the central banks merely taped over the epic capital shortfall that just got epic-er, increasing from €2.8 trillion to €3.2 trillion, an increase of half a trillion to over $4 trillion in one short year.
Sadly, just like back in April 2012, so now, Europe has no hope of actually addressing this much needed deleveraging and so the can kicking will continue until the number rises to $5 trillion, $6, $7 etc until one day the market's "head in the sand" strategy finally fails and every emperor around the world is found to be naked.
From the FT [13]:
Europe’s biggest banks will have to cut €661bn of assets and generate €47bn of fresh capital over the next five years to comply with forthcoming regulations aimed at reducing the likelihood of another taxpayer funded bailout.
The figures form part of an analysis by the UK’s Royal Bank of Scotland – which singles out Deutsche Bank, Crédit Agricole and Barclays as the banks most in need of fresh capital – highlighting that five years on since the financial crisis, Europe’s banks are still “too big to fail”.
Overall, the region’s banks need to shed €3.2tn in assets by 2018 to comply with Basel III regulations on capital and leverage, according to RBS.
The burden is greatest on smaller banks, which need to shed €2.6tn from their balance sheets, raising fears that lending to the region’s small and medium size enterprises will be sharply reduced as a result.
“There is too much debt still across Europe’s economies and the manifestation of that is on bank balance sheets,” said James Chappell, an analyst at Berenberg bank. “The major issue is that the banks still don’t have enough capital to write down those loans.”
Eurozone banks have already shrunk their balance sheets by €2.9tn since May 2012 – by renewing fewer loans, repurchase and derivatives contracts and selling non-core businesses – according to data from the Frankfurt-based European Central Bank.
Deutsche Bank recently said it would seek to cut its assets by about a fifth over the next two and a half years. Barclays, which announced a £5.8bn rights issue last month, said it wants to shrink its balance sheet by £65bn-£80bn.
Europe’s banking sector assets are worth €32tn, or more than three times the single currency zone’s annual gross domestic product.
Of course, if Europe's banking sector actually does take its deleveraging obligations seriously, what will happen to Europe's economy, where private sector loan creation is already at a record low level, will be nothing short of a stunning contraction, unlike anything seen in the past 5 years. And yet, that is precisely the path Europe most take in order to emerge on the other side with a healthy beating financial heart. That it won't is a given because doing the right thing would mean a complete wipe out for the banker oligarchy. And, as always, it will be the common man who will suffer when the forced deleveraging day finally comes.