Brexit Banking Crisis Unfolding
The Bank Index in Europe Just Had it's Largest Daily Drop Ever
"They're going lower ... avoid these ... don't pick bargains.. there's going to be some European bank stocks that lose all their equity value in 2016 ... like Bear Stearns style... it's a very grim picture.. it's a mess..."
( Read more... )
"They're going lower ... avoid these ... don't pick bargains.. there's going to be some European bank stocks that lose all their equity value in 2016 ... like Bear Stearns style... it's a very grim picture.. it's a mess..."
( Read more... )
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If you were a European bank back in the late 1990s seeing sovereign bond yields falling, it might have bothered you since a source of risky profits was disappearing. On the other hand, if this new ECB gizmo really did get rid of exchange-rate risk for the sovereigns issuing the debt and take inflation off the table by housing in Frankfurt the only money press in Europe, then it really was a banker's dream-a free option-safe assets with a positive upside, just like those CDOs we saw in the United States. So you would be a fool not to load up on them, and European banks did exactly that. But as yields converged, you would have to buy more and more bonds to make any money. There was, however, a small but significant difference in yield between the bonds of Northern European sovereigns and those of the periphery after the yields converged. So, if you swapped out your low-yield German and Dutch debt and replaced it with as much PIIGS debt as you could find, and then turbocharged that by running operating leverage ( ... )
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To get an idea of the risks involved in this trade for the sovereign, recall that if you take the combined assets of the top six US banks in the third quarter of 2008 and add them together, it comes to just over 61 percent of US GDP. Any one of these banks, on average, could then claim to impact about 10 percent of US GDP if it failed. Add the risk of contagion discussed earlier, and you have what the US authorities saw as a too big to fail problem. Now, you do the same with European banks in the forth quarter of 2008, which you must do on a national basis (the ratio of bank assets to national GDP) since there is at the time of this writing, no EU-wide deposit guarantee scheme, no EU-wide bailout mechanism for banks: it all falls on the national sovereign-and you get some seriously scary results ( ... )
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