The Telegraph's Ambrose Evans-Pritchard summarized the market's perception of the current state of bank solvency as:
In [Standard & Poor's] view, financial institutions ... face pressure where the quality of ... assets is deteriorating.
Deleveraging by European banks is intensifying, as they reduce their balance sheets amid worsening funding conditions, look to bolster their capital ratios, and address concerns about deteriorating asset quality among their borrowers.
By our estimates, a sample of 53 large eurozone banks from 12 countries will face bond market maturities of an historic record of over 205 billion euro in the first quarter of 2012."
I might add that EMU banks have a loan-to-deposit ratio of almost 1.2 (like Japan before the Nikkei bubble burst), compared to 0.7 in the US. They are much larger in aggregate, much more leveraged, and mostly underwater already on EMU bonds if forced to mark to market.
In essence, the whole eurozone is already insolvent. Face up to it.
(Yes, yes, before you all scream over there, Britain is insolvent too by the same yardstick. That is why it is useful to have the magical instrument of a sovereign central bank in such circumstances – and one willing to act – to conjure away the awful truth.)
Euroland’s crisis is not about Greek pensions or Italian labour laws, but about a vast and catastrophically ill-designed edifice of interlocking bank debt and sovereign debt.Actually, there is a circuit breaker other than the central bank, which really is designed as a circuit breaker for liquidity problems and not solvency issues. That circuit breaker is regulators also acknowledging that the banks are insolvent.
You cannot separate the two. The sovereigns are destroying banks, and the banks in turn are destroying sovereigns. The two disasters are feeding on each other. This will continue until there is a circuit-breaker, both to act as lender of last resort and to end the slump.
When that happens, the options available for addressing the solvency crisis expand. Specifically, they expand to include this blog's blueprint for saving the financial system - have the banks take the losses on the excesses in the financial system and have sovereigns invest in economic policies that restore growth.
Acknowledging that the banks are insolvent immediately raises the question of 'by how much'. The only way to answer this question is to require banks to disclose their current asset, liability and off-balance sheet exposures. This is the data that is needed so market participants can assess how much the book value of the bank's liabilities exceeds the market value of its assets.
It is also the data needed to restore confidence in and market discipline of the banking system.
Acknowledging insolvency also means acknowledging that banks can continue to operate for years with a negative book value. After all, the banks have effectively been doing this since the start of the credit crisis on August 9, 2007.
Thank you Mr. Evans-Pritchard making your comment on bank insolvency and providing the global financial policy makers with the freedom to fix the solvency crisis.