Monday, February 20, 2012

Big banks in EU rush for safety

The Wall Street Journal ran an article discussing how the largest banks in the Eurozone are depositing record amounts of funds with the global central banks.  The article theorizes that this is being done for liquidity purposes.

Regular readers know this is not being done for liquidity purposes but rather because the interbank lending market is frozen.

The interbank lending market froze because none of these banks can evaluate the solvency of any of the other banks.  In addition, each bank knows that it is hiding losses on and off its balance sheet, so it wonders just how big are the losses that the other banks are hiding.

Top European banks, responding to new regulations and wary of lending, are stashing increasingly large sums of money at central banks around the world in a collective flight to safety. 
The eight giant European banks that have disclosed their annual results in recent weeks reported holding a total of about $816 billion in cash and deposits at central banks as of Dec. 31, according to calculations by The Wall Street Journal. That is up 50% from a year earlier, when the same banks were holding roughly $543 billion. 
The stockpiling, which occurred over the course of last year, represented a collective response to the growing pressures on the European financial system. 
By storing funds at central banks in Europe, the U.S. and elsewhere, banks ensure that their money is safe. And they appease nervous regulators who want to guarantee that banks will have easy access to funds in a pinch. 
But the strategy has a downside. Banks are depositing money at central banks instead of lending it to individuals, businesses or governments, which has the potential to exacerbate a Europewide lending drought. In addition, central banks pay paltry interest rates on the deposits, squeezing bank profits. 
Hard-hit French banks were at the vanguard of the trend. Last year, Société Générale SA more than tripled the amount of money it was placing at central banks world-wide, to €44 billion ($57.8 billion). BNP Paribas SA's central-bank deposits soared 74% to €58 billion. More than half of BNP's deposits are parked at the Federal Reserve, with the remainder at the European Central Bank, the Bank of Japan and other central banks. 
"We have faced a huge crisis in the second half of last year. And so we reacted as fast as possible in order to be on the safe side," BNP Chief Executive Jean-Laurent Bonnafe said last week. 
In addition to BNP and Société Générale, the six other banks included in the tally are Spain's Banco Santander SA andBanco Bilbao Vizcaya Argentaria SA; Switzerland's UBS AG and Credit Suisse Group AG; Germany's Deutsche Bank AG; and the U.K.'s Barclays PLC. Each reported holding more cash and central-bank deposits at the end of 2011 than a year earlier.... 
"It's a symptom of where the markets are right now and how people feel safer putting their money at central banks," said an official at a top Spanish bank.... 
Some European banks acted at the behest of individual regulators. Spain's Santander—which increased the amount it deposited at central banks to €97 billion at the end of December, up 58% from June 2010—said the rise was partly due to tougher liquidity rules in the U.K. and Brazil, where it has major operations....
It is unclear whether the deposit levels will remain elevated for the foreseeable future. Some bank executives say it is likely a long-term phenomenon as banks adapt to new regulations. 
Others say banks might find better uses for the funds once market conditions improve. 
"There is no need to keep such a huge buffer once things would stabilize and calm down," said BNP's Mr. Bonnafe. "So this is something we are going to manage in order to try and optimize between security and cost."


Fungus FitzJuggler III said...

This always happens in a credit collapse!

The banks are all bust and now exist to destroy wealth for as long as they are allowed to. They cannot lend into a declining asset market, can they? So they take money and speculate on commodities, creating a bubble, recording paper profits, but eventually, this bubble too will collapse!

Scrap the banks and remove corporate limited liability from all such organizations!

Richard said...

I don't think we should scrap the banks or remove corporate limited liability from banks.

The question that no one seems willing to ask is "how did the banks come to be such risky businesses when they are highly regulated?"

My answer is that regulators stopped doing their job over two decades ago when, led by Alan Greenspan, they bought into the concept that market discipline was more effective than regulation.

This might be true, but there is one condition that is necessary for market discipline to occur. This condition is that market participants have access to all the useful, relevant information in an appropriate, timely manner.

For banks, this is satisfied only with ultra transparency.

Clearly, ultra transparency does not exist today for all market participants. It only exists for regulators.

If regulators want banks to be subject to market discipline, they need to require banks provide ultra transparency.