Are Europe's Banks In Worse Shape Than U.S. Banks? EU Commission Warns Of Systemic Danger

* Feb 12 Telegraph: Confidential EU finance minister memo: The toxic debts of European banks risk overwhelming a number of EU governments and may pose a “systemic” danger to the broader EU banking system. EU banks hold balance sheet assets of €41.2 trillion (€25 trillion in EMU, or 2.7 times annual GDP)--> see banking systems in Germany, France, Italy, Spain
* cont.: EU banks have $1,600bn of exposure to Eastern Europe -- increasingly viewed as Europe’s subprime debacle, and EU corporate debts are 95% of GDP compared to 50% in the US, a mounting concern as default rates surge.
* GoldmanSachs (not online): We estimate total gross losses of Eurozone owned banks at EUR915bn (10% of GDP). Banks have so far written down the equivalent of 4% of GDP. Even if the remaining 6% would fall on the taxpayers, this would not pose any overwhelming risk to the Eurozones aggregate fiscal position (projection for 75% of GDP)
* Daniel Gros/Stefano Micossi: The “overall leverage ratio” - a measure of total assets to shareholder equity - of the average European bank is 35 due to large in-house investment banking operations, compared with less than 20 for the largest U.S. banks. This means that relatively small writedowns on their assets could have a devastating impact on a bank’s capital
* BNP Paribas: see "To the Rescue" for size and composition of individual capital and guarantee schemes. So far, Eurozone governments pledged over EUR2T in guarantees and capital (22.6% of GDP). UK pledged EUR385bn (25% of GDP), and CH EUR4bn (1% of GDP). Compare with U.S. $2.6T (=EUR2T or 18% of GDP).
* Thomas et al.: flow of 40% of U.S. originated securitizations are held abroad (mostly in EU)--> out of $10trillion 'shadow banking system' assets to be shed by the global banking system according to IMF, about $4 trillion are held abroad.
* BIS, ECB data shows that among main net buyers of U.S. originated assets are Germany and France, whereas the UK has large two-way flows but low net seller position vis a vis the U.S.
* Dec 2 IRA: We hear from a very well placed Buy Side investor with extensive business interests in the US and EU that three primary banking institutions in Europe, two French and one German, have such significant CDS exposure and other problems that they cannot even begin to fund the payouts anticipated over the next quarter. The funding squeeze reportedly is exacerbated by a near-collapse among weaker players in the hedge fund market.This past summer, when the bank put out a call for redemptions of $4 billion in hedge fund investments, says the source, only $400 million was returned. And the French bank also used these same hedge funds and others to reinsure some of its own CDS exposure--> the investor claims that EU officials are considering a moratorium on CDS payments by the three Euroland banks in question. The banks would be given ten years to write down their CDS and hedge fund exposures and would receive additional infusions of capital by their respective governments.

Policy Response:

* The ECB drew up guidelines for European governments that are considering "bad banks" to house lenders' toxic assets. The ECB is also working on guidelines for governments that plan to guarantee toxic assets remaining on banks' books, another form of bank bailout.
* Meanwhile, the European Commission wants that toxic assets are written off at market value, and that any write-offs will first have to come out of shareholders’ capital. Once the capital falls below the Basel ceilings, it is up to the government to provide new capital, or to force the bank into bankruptcy procedures.
* The Treaty forbids the ECB or national central banks to provide credit to any EMU government directly (no bailout within EMU clause) However, the ECB Council can decide to buy government securities in the secondary markets if consistent with price stability objective (GoldmanSachs, not online)