Bundesbank Warns German Banks To Expect At Least 50% Losses On Austrian "Black Swan"

Just over a month ago, on March 1, the Austrian financial world was shaken by news that the first bank bail-in following Cyprus would not take place in Greece as many had expected, but in Vienna: judged by the rating agencies to be one of the safest places in the world, where the bad bank that was created to help with the wind-down of the defunct Austrian lender Hypo Alpe Aldria, would itself be unwound, with creditors suffering the bulk of the pain in the form of the first official "core Eurozone" bail in.

Truly a "black swan" event.

This, together with the revelation of the sordid state of Heta's books which was only revealed after the bail-in fact, was certainly a shock to bondholders, who had been treating Heta bonds as money good as recently as last summer, only to face losses as large as 50%.

Since then we have witnessed several disturbing downstream events, the first of which was the insolvency of Austria's province of Carinthia, which it was revealed was a direct guarantor of Heta bonds. Since the liability of Carinthia was equivalent to €10.2 billion, or nearly five times the state's 2014 operating revenue, it promptly became insolvent overnight (absent more sovereign bail outs).

A few days later we also found out who the first foreign casualty of Heta would be: a sleepy German bank, Duesseldorfer Hypothekenbank, which was just as quietly taken over by Germany's banking association and FDIC equivalent, the Bankenverband. As we reported previously, the catalyst for the bank collapse was DuesselHyp exposure to Hypo debt, which according to a 2013 disclosure was 348 million euros.

This was Duesselhyp's second bailout since the financial crisis.

The punchline? According to its latest interim financial report Duesselhyp had €10.9 billion in assets, or in other words, a 1.5% asset impairment led to the terminal collapse of a bank in what all consider to be Europe's safest country.

This is what we said:

... if a 1.5% write down in the assets of a supposedly well-capitalized German bank can lead to almost overnight insolvency, one can almost imagine what will happen when the Austrian black swan wave reaches Europe's actually "undercapitalized" banks...

Why is all of this relevant? Because we may not have to wait too long until the next Heta/Hypo casualty is revealed.

In a critical disclosure this past Friday which quietly flew under everyone's radar, the Bundesbank director responsible for bank supervision, Andreas Dombret, who is also a member of the board of the European Central Bank’s Single Supervisory Mechanism told Bloomberg in an interview in Johannesburg that "German banks should expect to lose at least half of their investments in bonds of Austrian bad bank Heta Asset Resolution AG and make the appropriate provisions."

Dombret's somber warning continued: "I think this situation has to be taken seriously by the German banks. It’s advisable and recommendable to take provisions on this, and if I were to put a number on this I would say it should be a minimum of a 50 percent provision for potential losses."

He did not have a rule of thumb estimate for the maximum losses Heta creditors may suffer as it is self-explanatory.

The warning is great. The problem is how practical will it be to implement it.  As Bloomberg reports, "German lenders and insurers have emerged as the biggest creditors of the bad bank set up after the collapse of Hypo Alpe-Adria-Bank International AG, with about 7.1 billion euros ($7.5 billion) at risk."

So where are German banks in their preparations to take a "50%-off" red market to their bad bank exposure?

Bayerische Landesbank, a former owner of Hypo Alpe, has the biggest exposure among German banks, as around 2.4 billion euros of loans to the former subsidiary weren’t repaid. Commerzbank AG, Deutsche Pfandbriefbank AG, NordLB, and a German unit of Dexia SA all own Heta debt.


While BayernLB has said it will set aside provisions equal to about half of what Heta owes it, Dombret’s recommendation goes further than some of the disclosed provisions other banks have made. Deutsche Pfandbriefbank said it wrote down its 395 million-euro investment by 120 million euros, or 30 percent. Austria’s Hypo NOE Gruppe Bank said it provisioned its 225 million-euro holding by “about a quarter.”

Things get more amusing: "HSH Nordbank, which was bailed out in 2009 and holds a guarantee on losses above 3.2 billion euros from the states of Hamburg and Schleswig-Holstein, said today that it may raise provisions on Heta bonds from the current level of 40 percent."

So a bailed-out German bank bought the bonds of a failed Austrian bank on hopes it ongoing bail-out by the Austrian state would continue, only to find this assumption fundamentally flawed, and is now itself holding the bag on what is looking like a 50% cut in the bailed-in bonds.

Only in Europe.

“We already took conservative provisions in the fiscal year of 2014,” [HSN] spokesman Max Loebig said in response to questions by e-mail. “We are now examining whether to raise provisions to the discussed 50 percent of the total investment.”

And when the inevitable write down comes and HSN finds itself capital deficient once more, it will be up to the taxpayers of Hamburg and Schleswig-Holstein to decide if they in turn want to fund yet another bail-out by the same bank, or bail in its creditors.

Because it is called a domino effect for a reason.

And the biggest irony in all of this? Instead of allowing banks to boost their balance sheets with "safe" collateral (because if the above reveals is that nothing in Europe is "safe") in the form of "safe" German bonds, the ECB is actively soaking up safe collateral, resulting in a total collapse in bond, and overall market liquidity, instead replacing HQC with inert, zero-velocity reserves, and actively assuring that it is only a matter of time before the next European "safe" bank fails.

Actually, scratch that: the biggest, biggest irony is that the higher the European stock market rises, pushed into the stratosphere by excess reserve fumes, the greater the probability of a market-wide lock-up, as "safe" German banks, clearly exposed to Europe's trillions in non-performing loans, are incapable of handling an even 1.5% asset writedown without promptly requiring yet another bailout!