The party line is everything is fine in bank land….even Eurobank land. But some recent developments suggest otherwise.
The business news on Europe has pretty much daily updates on the unfolding and linked sovereign debt/ bank solvency crisis. The officialdom insists this looming problem can be resolved but most observers think it can’t be in the absence of a fiscal union, which is a political bridge too far right now.
In a not-widely-noticed replay of pre-crisis conditions, the cost of swapping euros into dollars to the same high level observed last May, when sovereign crisis fears were at a peak. This is of concern because European banks have a dollar funding gap, meaning they will come under liquidity stress if they cannot roll dollar funding. And the friendly ECB cannot solve this problem unassisted; the ECB can only provide Euro funding.
As the Financial Times noted earlier in the week:
European banks currently have an estimated funding gap of about $500bn, which means they have to raise this amount from the markets to fund dollar loans, meet swap arrangements and pay for trading book transactions that require the US currency. The dollar funding gap was estimated at more than $1,000bn at the time of Lehman’s bankruptcy.
The Institute of International Finance, which represents more than 400 financial services groups around the world, warned in a report last week that some European banks appeared to be facing dollar funding pressures…
The effects of the end of the year – when banks are more reluctant to lend to rivals as they want to protect their own balance sheets – have also pushed up the costs of swapping euros for dollars. However, dollar swap lines opened up between the ECB and the US Federal Reserve have eased pressures.
Not surprisingly, the Fed has extended the currency swap lines, due to expire in January. Per Bloomberg:
The Federal Reserve authorized the extension through Aug. 1 of its temporary dollar liquidity swap arrangements with the European Central Bank and the central banks of Japan, Canada, Switzerland and the United Kingdom…
“Global tensions have worsened over the past week because of Ireland’s crisis,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “It doesn’t solve the problem but it’s helping soothe symptoms.”…
The ECB said U.S. dollar liquidity-providing operations will continue to have a maturity of seven days and take the form of repurchase operations against eligible collateral. They will be carried out as fixed-rate tenders with full allotment, the ECB in Frankfurt said in a separate statement.
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Clearly we need more information and maybe commentary on all of this and what it means to the “man on the street.”
Are you suggesting we could, possibly, be close to another banking crisis because that’s the takeaway I get.
We also need at least weekly, if not daily, updates on this situation, as serious as it sounds. Thanks for the “heads up.”
If NOTHING has been fixed (and it hasn’t), then we still stand at the precipice of the abyss.
Yves,
I wish you’d write more about this — on the historical background, why it’s important, what it may bode for the future, etc.
This story strikes me as being akin to tremors before an earthquake.
There is “Secrets of the Temple” by William Greider as a dated history of the Fed but I don’t know of a similar about the IMF and world banking. If anyone can explain it, Yves is probably the one. I would like to understand more about country/currency reserve requirements in relation to the dollar and how the supposed trillions added to the US dollar base effects other currencies.
My rather crude view is that the Fed has the EU by the short and curlies and perhaps they are in for a bit of Shock Doctrine like Americans.
The US Federal Reserve is acting as Reserve bank to foreign banks via the ECB, etal since they need $USD reserves in addition to their local currency (EUR/CHF/GBP) reserves.
With the Euro bond market seemingly ready to chop off the heads of Euro periphery issuers, now is not the right time to allow that reserve swap backstop arrangement to lapse. Doesn’t seem like an omen beyond the horrors we are already contemplating, merely a sensible response to those known unknowns.
The arrangement allows for a possibility of loss-risk to the US Fed, but the ECB/Euro would have to implode first. Otherwise, this arrangement is no sweat for a Federal Reserve Bank with unlimited funds.
IM
Two perhaps uninformed questions. I thought the world was awash in dollars so even if there are a lot of dollar denominated settlements to be made why aren’t they available? Is this an indication of a flight to safety or that financial markets think the euro is a lot shakier than it is being represented? Or is this all a scam, a way for eurobanks to avoid paying a premium, or a higher premium anyway, on dollars by getting the central banks involved?