Wednesday, July 25, 2012

ECB's cheap loans have allowed banks to defer recognition of losses on bad assets

The Telegraph reports that according to accountants KPMG,

more than €1.5 trillion (£1.16 trillion) of non-performing loans are currently sat on European bank balance sheets.
Please re-read the highlighted text again as the losses hidden on the European bank balance sheets are staggering.

KPMG has just confirmed that the EU banking system is insolvent.

Much more importantly, KPMG has just confirmed a) that depositors don't care whether their bank is solvent or not so long as they trust in the deposit guarantee, b) that banks can continue to operate and support the real economy so long as they have access to central bank funding and c) the roadblock to banks absorbing their losses is the Financial, Academic, Regulatory complex (FARC or the Opacity Protection Team).
Graham Martin, corporate finance partner at the firm, said a “confluence of factors” had restricted the much-anticipated flow of transactions in this market. 
“Perhaps the most powerful factor in delaying much-needed de-leveraging by European banks has been the European Central Bank’s injection of more than €1 trillion of long-term refinancing operations in December 2011 and February 2012,” he added....
However, the ECB’s three-year money has largely been used by banks to strengthen their balance sheets through profitable carry trades, reducing the pressure on them to sell non-core assets at non-desirous prices.” 
A more powerful factor has been the financial regulators pushing for banks to achieve a meaningless 9% Tier I capital ratio.  The ratio is meaningless because the losses are still hidden on the balance sheet in the form of zombie loans.
Despite this, research from KPMG suggests the non-performing loan market is likely to become one of the most actively traded debt classes over the next 12 months.
This won't happen so long as the financial regulators keep moving the Tier I capital ratio up.
Jonathan Hunt, associate director at KPMG, said: “While consumer debt has traditionally been the easiest asset to sell, banks are increasingly seeking to sell different asset classes. 
“In the UK and Europe for example, over the past six months many vendors have focused on the disposal of commercial real estate, leveraged and residential mortgage loans through both clean and structured trades. Further, increasingly more challenging and longer-dated assets, such as infrastructure finance, shipping and transport loans are also coming to market.”

No comments: