Monday 29 September 2008

European Banking teeters on the edge

I came across interesting (in the chinese sense) numbers on Leverage Ratios for European banks in an article at Vox last week (the original is here ). The highlight quote is:

The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mae) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of "only" 33, but its liabilities are several times larger than the GDP of its home country (Belgium).

Fortis got hacked apart yesterday, who’s next?

For a view of something closer to home (for my two Irish readers) Bank of Ireland’s overall leverage was around 27 as of last year sometime and AIB was around 18. So they’re not quite as bad as some of the worst in Europe but if they were to go catastrophically bust it would sting quite a bit. BoI lists its total “assets” as being $251bn (say €180bn at the going rate) or thereabouts. If I’m understanding such things correctly (and I may not be, feel free to correct me in the comments) then their leverage ratio means they have about €6.5bn in actual liquid capital with about €174bn hanging out in the wind in various financial products if they were to start to unwind. That’s coincidentally close to the GDP of Ireland but at least we have the ECB to help bail us out if something goes badly wrong. Thankfully the Europeans like us because we’re such good Europeans, oh hang on a tick didn’t we just vote no on something to do with that?

Also note that I’m amazed that even though the ISEQ is just continuing down a 2 year long slide from it’s peak of around 10K to its latest close at around 3200 that our glorious local stock market has evaporated 68% of its value in a mere 24 months. Makes Wall Street and the Dollar look like ace performers at the moment.


Eddie said...

Have to admit that I disagree with you entirely on that. You must have more than two Irish readers!

Pat C said...

Ha- now that we Irish taxpayers are now part-owners of our glorious banking system, compliments of Cowan's Crew, won't we have fun at local election time next year.... "Now tell me Councillor, can I cash in my €100,000 shareholding and offset it against my bin charges, etc...."

Peter said...

Don't confuse the issue - we didn't get a shareholding , we are only providing unbelievably cheap insurance to all the Irish banks where we will cover their risk , but not have access to their profits

Joe Mansfield said...

Peter - absolutely agree with you. you'll note that I wrote this on Monday which was before Lenihan's plan to provide a (free*) €400bn financial insurance service to Irish banking was announced.
I'll be posting a detailed comment on that later but in the meantime I have to say that right now I think it was a clever move. It will cost us a lot of money but I genuinely believe that the risk of a collapse was imminent without it and such a collapse would have cost us all a lot more. The moral hazard risk is immense though and the long term effects of that may well end up hurting us badly too.

db said...

I guess we prove the comment wrong - thats 4 Irish readers and my first blog coment ever - shame it didn't spark even a mildly clever comment :-)