Saturday, December 24, 2011

Nervous banks stash billions with ECB

A Guardian article confirms that Eurozone banks are facing a solvency crisis.  The first sign of a bank solvency crisis is when banks with excess funds refuse to make loans to each other over concern about repayment.

Banks from the 17 countries that use the euro have stashed €347bn (£289bn) with the European Central Bank, in another sign that they remain wary of each other despite a massive credit operation earlier this week. 
The figure, which was announced on Friday, is the highest for 2011, topping €346.4bn earlier this month. 
It is a sign of unease in the interbank lending market where banks raise operating funds. 
It suggests banks are depositing money with the ECB at low interest rates because they are afraid to lend it to other banks out of fear that they will not get paid back. 
Please re-read the previous sentence.

The far of not getting paid back is a function of the inability of banks to independently assess the creditworthiness of the borrowing bank.  Banks cannot make this assessment because of a lack of disclosure of all the useful, relevant information in an appropriate timely manner.

It is only when banks provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details that market participants, including other banks, have the data they need to independently assess each bank's risk/creditworthiness.
Europe is suffering from a debt crisis marked by worries that heavily indebted governments such as Italy may be unable to pay off their bonds. That means trouble for banks because they typically hold government bonds.
Government bonds are just one of many bad assets that banks are holding.  The list includes residential and commercial real estate loans as well as toxic structured finance securities.
The large deposits come despite Wednesday's massive central bank credit operation, in which the ECB let banks borrow as much as they wanted for up to 3 years. As a result 523 banks took €489bn, the largest ECB loan operation in the 13-year history of the euro. 
The ECB has increased lending to banks to help them get through the crisis. Some are finding it impossible to raise money elsewhere, so the ECB steps in as lender of last resort, a typical role for central banks in times of turmoil. 

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