A colleague I’ve cited occasionally who has extensive contacts at the Treasury and pretty good ones at the Fed has been muttering for some time that European banks are in every bit as bad shape as US banks and he has been waiting for that shoe to drop. He also sees that as intermediate good news for the dollar, since he feels the problems are so deep-set that the ECB will have to cut rates, which will depress the euro. However, he is a long-term dollar bear.
Those worries came to the surface today as rumors surfaced in Europe today, FT Alphaville voiced some skepticism about the targets of some of the rumors (and let’s be clear, this blogger does not know whether any of the rumors about specific banks are valid). FT Alphaville started by discussing the 8% fall in HBOS:
On Wednesday its stock plunged 17 per cent at one stage, quickly followed by RBS, HSBC, Alliance & Leicester and every other British bank that traders could short in an instant.
Reason? Take your pick. From London’s rumour wires:– no foreign travel for easter holidays by senior bank of england staff, supposedly means UK clearer in trouble.
– LLOY LN IR actually denied fundings probs.
– HBOS denied prob to Merril’s , but as yet, not to the mkt, still being sold.
– RBS annual report which was released last night apparently shows massive funding requirements.
– ARE UK BANKS THE SUB PRIME OF WORLD BANKING CONSIDERING THAT NONE HAVE CONFESSED TO ANY CREDIT PROBS YET, IS BARC MADE OF TEFLON ?
– UBS, Swiss Govt apparently asked CSGN to put togther rescue package for UBS in case that the crisis worsens.
– Soc Gen, BNP says no merger interest, spec thats because they have more horrors
All of which – just to be clear – is complete rubbish. We believe. For now. Hang on. Jeepers!? What’s going on with Bradford & Bingley!?!?!?
Research Recap sheds some light, as opposed to fear, on this topic, finding (consistent with the rumor mill in the US) that UBS has not marked down its suspect paper as deeply as most of its peers:
Now that Goldman, Lehman and Morgan Stanley have allayed the greatest fears about their liquidity, the focus is moving to European banks……
In this context, CreditSights offers a timely analysis of European bank exposure to Collateralized Debt Obligations. While there’s more writedown pain ahead, CreditSights does not anticipate a solvency issue.
UBS still looks most vulnerable to further write-downs, with SocGen, Barclays and RBS also in the frame, while Fortis appears to have been most conservative.
Credit Sights finds the difference in write-down ratios between the banks surprising.
For example, Barclays, RBS and SocGen are holding their super senior ABS CDOs (high grade and mezzanine combined) at well over 70% of face value, whereas Fortis is at 55%. The differences are even starker on the mezzanine tranches, ranging from 20% of face value at Dresdner to 80% at SocGen.
Our model indicates a shortfall in write-downs of over $3 billion for Barclays, RBS and SocGen, and of over $6 billion for UBS . Even if we accept that our model overstated write-downs for 2007 and was too conservative, for whatever reason, there will be additional write-downs since the year end that could be substantial – over $1 billion for Barclays, RBS and SocGen, and over $3 billion for UBS.
Given possible write-downs on other parts of its portfolio, however (including RMBS and Alt-A mortgages), UBS’s performance is likely to remain under severe pressure in the first quarter, CreditSights says.
We continue to think that, with the exception of UBS, this will be an earnings question (and possibly a threat to credit ratings) rather than a solvency problem. We should note also that the UK banks report results semi-annually, so Barclays and RBS will not be releasing first quarter numbers, although they might decide to publish trading updates that are more detailed than usual.
….In a March 4 report, Morgan Stanley said it remained
Underweight UBS & short in our model portfolio on concerns that credit dislocation could add more downside.
In our bear case, we had been estimating ~$10-15bn of incremental losses for 2008; we revise this to $15-25bn (the latter we hope is a very low probability fat tail). This may appear harsh, but UBS has been consistently behind the curve in marks.
The Swiss Finance Minister today said that UBS and Credit Suisse have “a solid capital base.”
Meanwhile, Bear Stearns forecasts writedowns of 1.5 billion Euros for French banks, led by Credit Agricole.
The fact that the regulator felt compelled to issue a reassurance shows how pronounced the concern is. And UBS is a far more important player to global intermediation that Bear Stearns is. A train wreck there would have more serious consequences.
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Just to add that a train wreck at UBS would be the responsibility of the Swiss, not the Americans – have the Swiss ever bailed out a bank with public funds before?
So UK and Swiss banks are in trouble? Ok, but what does that have to do with the euro? Spanish banks are strong, French and Italian banks are not half as troubled as their American counterparts, only some German banks may have some surprises down the road.
Europe is diverse!
Actually the ECB started bailing out the Spanish and German banks the week before Christmas. One number bandied about at the time was $500B worth of help.
Lots of EURO banks dumping their toxic waste on the ECB’s balance sheet.
There’s been no bail-out for Spanish banks. Although there’s been a spike in ECB lending to Spanish banks, due to the global strains, ECB lending to Spanish banks is lower than it should (lower than Spain’s contribution to eurozone GDP).
Spain’s banks are robust. They lent the money they had, no leverage.
very low probability fat tail
This phrase is an oxymoron — fat tails are fat because they don’t have a very low probability.