European bank run continues: as France joins Ireland, Greece, Spain and Portugal

The NY Times ran an article discussing the European bank run and how it has now spread to France's largest banks.

Regular readers know that these banks (BNP Paribas and Societe Generale) have responded by dramatically increasing their disclosure.  In fact, BNP Paribas appears to be on the verge of providing "utter transparency" to halt the run it is experiencing.

Even as European investors race to abandon shares in French banks, on this side of the Atlantic, banks, brokerages and other American financial institutions are quietly reducing their exposure too, turning down requests for fresh loans from the euro currency region and seeking alternative investments. 

In August, American money funds and other suppliers of short-term credit chose not to refinance roughly $50 billion of debt issued by European banks, a drop of 14 percent, according to JPMorgan research. Traders are so worried that they are forcing French banks like Société Générale and BNP Paribas to pay more to borrow dollars — and they often can do so only for a week or less.... 

“It hasn’t been a wholesale pullback,” Mr. Roever said. In 2008, after the collapse of Lehman Brothers — when a key money market fund sustained huge losses on Lehman debt and investors started pulling their money out of the funds — he said, “everybody shut off at once. It was like a cliff. This time the pullback has been more gradual.” 

However, the effect is the same - private investors' money is replaced by liquidity from the central banks.

It’s not just money market funds that are getting cold feet. 

On Wall Street, some big American banks have become wary of derivatives tied to French banks like Société Générale and BNP Paribas, several traders said.

This is what happens when banks can not assess the risk of their counter-parties.

... And since last month, according to several bankers who insisted on anonymity, hedge funds and other firms have also withdrawn hundreds of millions of dollars from prime brokerage accounts held at French banks. Prime brokers hold assets for hedge funds and other investors, while providing loans for increased leverage on their bets. 

Hedge funds are very sensitive to the solvency of their prime broker after Lehman's bankruptcy froze their assets and subjected them to unexpected losses.

While still small, this kind of transfer echoes the larger move hedge funds made as Lehman teetered in 2008, when a tidal wave of withdrawals helped sink the bank. 

Not everyone is anxious. Some money market giants like Fidelity and Federated Investors are sticking with French banks despite the increased anxiety. At Federated, which has $114 billion under management in prime money market funds, about 13 to 17 percent of assets remain invested in French bank debt, according to Deborah Cunningham, a senior portfolio manager at Federated. 

“We’re always rethinking it and assessing it, but we’ve not come up with a different answer,” she said. “We don’t feel there’s any jeopardy with regard to repayment.” 

At Fidelity, which manages a total of $428 billion, Adam Banker, a spokesman, said, “We’re very comfortable with our money market funds’ European bank holdings, including French bank holdings.”

Actually, given the on-going series of bailouts of the banks, the funds might expect that the French government will step in an make them whole.

... “There is a paucity of capital in the European banking system,” said Eric Green, an economist at TD Securities. “There is crisis fatigue in Paris and Berlin. Now there is some question about how much they are prepared to go to the mat to save Greece from default.”

Since the start of the financial crisis in August 2007, the solution has always been 1) disclose each financial institutions current asset and liability-level data, 2) let the market analyze this data to determine who is solvent and who is insolvent, 3) determine which of the insolvent banks will be allowed to retain earnings to restore their solvency, which will require an equity infusion to restore solvency and which need to be closed down.

In another sign of the strain, Société Générale put out an unusual announcement on Monday morning revealing it had more than halved its unsecured dollar funding to $33 billion euros, from $72 billion euros in early July. That has forced the bank to look elsewhere for dollars to finance its operations, including the foreign exchange markets.

When opacity is the norm for financial institutions, disclosure is considered unusual.

Fortunately, the banks realize that disclosure is what restores market confidence and that it should be the norm going forward.

With French and other European banks chasing dollars, the cost of swapping euros for dollars three months from now has spiked .... And that’s after a number of emergency support measures undertaken by the Federal Reserve and other central banks to ensure that global financial institutions do not run short on dollars. 

For now, the market is signaling that the risks are likely to loom larger for European institutions than banks in the United States. Still, the longer the uncertainty persists, the more investors on both sides of the Atlantic will feel jittery. 

What’s more, regulators do not fully know just how much of a risk derivatives tied to European banks pose for American firms. 

Regulators do no fully know because they do not require banks to disclose all their current assets and liability-level data.  If banks made this disclosure, market participants, including all the banks analyzing their competitors, would tell them.

“Because of the uncertainty with the Germans, the European Union and the International Monetary Fund, you’re not going to see an easy, quick resolution,” said Mr. Roever of JPMorgan. “This is a problem that isn’t going away soon.”