Run on the European banks continues

Regular readers know that I routinely document both the ongoing run on the European banks and why, because of a lack of disclosure, it is occurring.

Yves Smith, at NakedCapitalism, provides both additional documentation on the on-going European bank run and, using Bank of America as an example, a very insightful observation into how banks failed to use the Great Reprieve to end the solvency issue.

In a post on the sucking sound of liquidity draining from the Eurobank market, she said,

But one thing that is a clear danger signal is liquidity leaving the banking system. It’s like the preternatural calm when the water leaves the beach, revealing much more shore than usual, before the tsunami rolls in. 

A very good overview at the end of last week by the International Financing Review highlighted one clear danger sign: many mid tier banks in Europe are unable to get funding in interbank markets and are increasingly dependent on the ECB. The whole piece is very much worth reading. Key extracts: 

Bankers who once ran the now-defunct repo facilities for medium-sized European banks say the credit lines were withdrawn after risk managers became concerned about their own exposure to the unfolding sovereign debt crisis, leaving some clients now solely reliant on central banks for cash….

The closure of traditional credit lines is a clear sign that concern about European sovereign debt has infected the region’s banks. Many in the region are big holders of the debt of their respective governments. According to the EBA stress tests published in July, the 90 banks it surveyed held a total of €326bn in Italian government debt, €287bn of Spanish public debt, and €215bn of French debt.

“Everyone has been cutting their exposure,” said the head of another European investment bank. “It started with Greece, then Spain and now Italy. People don’t want to do business with these banks. Many of them have good underlying businesses, but they are stuffed.”

For many, the European Central Bank is now the last remaining source of liquidity. Under its open market operations – brought in during the depths of the crisis to pump liquidity into the region’s banks – its member central banks provide unlimited repo financing against certain eligible assets.

Demand for that money has been picking up of late, as banks feel the squeeze of dry private credit lines. Earlier this week, the Italian central bank said lenders asked for €80.5bn of liquidity during July, almost double what it had provided only a month earlier, in a sign of banks’ deteriorating finances.

Total use of the ECB’s main refinancing and long-term refinancing facilities – both part of the open market operations – are now close to €500bn, up from about €400bn in the spring.

FT Alphaville also took up the theme of Eurobank financing stress, citing Morgan Stanley analyst Huw van Steenis, who points out that the 5 year CDS of Eurobanks are trading wider than they did in 2008... 

And the journalist from (Graham) Greeneland, John Dizard, also points that the system is close to going into a critical state: 

Not that there’s a European banking crisis just yet. We can see how close we are coming, though. As US money market funds cut back on their European exposures, even the best European banks have to fill the gap by borrowing euros short term from the ECB, and swapping those into dollars. Last week the cost of that process for large banks reached between 80 and 85 basis points. Measuring that against the 100 basis point penalty rate for the Federal Reserve dollar swap facility with the ECB, the system was about 15 or 20 one hundredths of 1 per cent away from a crisis.

Dizard also points out that the Eurozone isn’t prepared to enter into broad scale bank recapitalization programs; they’ll have to take place on a country by country basis.... 

Yet it does not appear that money market funds are all that sanguine. They’ve been pulling back from European banks for a while; the dry up of funding to medium-sized banks described in the IFR article is in part due to their newfound caution. 

In a separate post, she summarizes the policies that were put in place to give banks a chance to address their solvency problems.  These policies lead brought us the Great Reprieve.

The bank is in many ways a victim of the Geithner stress test/extend and pretend charade. BofA and Citi were on the verge of failure in early 2009, and the powers that be chose to go easy on them and rely on cheerleading, regulatory forbearance, super low interest rates to provide easy, low risk profits, and some capital raising. The problem is that everyone drank the Kool Aid and BofA didn’t take aggressive enough action, either on boosting its equity or shrinking its balance sheet, when times were better.

The same was true of the European banks.

Your humble blogger would add one more to the list of aggressive actions that the banks should have taken:  disclosure to all market participants of all the useful, relevant information in an appropriate, timely manner.  This is current asset and liability-level data for banks.

The result of not taking this last action is that Eurobanks are now back in the position where nobody knows who is solvent and who is insolvent.  Hence, the bank run as it is better to get your money out sooner.