Thursday, February 11, 2016

Something Is Really Rotten In The Banking System.......

Something Is Really Rotten In The Banking System

The next wave of economic troubles is already washing ashore before they had a chance to fully recover from the last crisis. Obviously, not all banks are affected by this to the same extent, but the banking system is deeply interconnected, so even institutions that appear relatively insulated from the currently brewing set of problems may actually suffer damage if things get out of hand. All signs are that things are in fact in serious danger of getting out of hand.

Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank's printing press as a go-between.

Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less.

Apart from the astonishing €1 trillion in dud loans that remain on European bank balance sheets in spite of serial bail-outs and the erection of numerous "bad bank" structures into which such loans are "disappeared" so as not to mar the statistics any longer, one must keep in mind that economic confidence has been crumbling for almost two years:



Prior to the last crisis, European banks were known to be among the largest financiers of commodity traders and Asian emerging market companies. We have a strong suspicion that this hasn't magically changed in recent years, especially as the EM and commodity universe seemed to be fine again for several years once Mr. Bernanke started up his printing press and China pumped up its money and credit supply like a drunken sailor in the wake of the 2008 crisis.

Well, they are no longer fine. In fact, the debt of commodity producers and emerging market companies has been plunging to distressed levels at warp speed since the middle of last year. This is likely to get worse if China is forced to "let the yuan go." 




Then there is the fact that banks perforce remain exposed to what occurs in financial markets. Their proprietary portfolios have shrunk, but that doesn't mean they don't remain intertwined with the markets through all sorts of funding channels, including numerous opaque ones in the shadow banking system. The problem with this is that confidence is very fragile, and credit stress often emerges from entirely unexpected places (as e.g. happened in 2008).

As is seemingly always the case, when it rains, it pours, for banks the deluge is coming.

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