December 11, 2011 – LONDON – The Telegraph sounded alarm bells late Friday that the Eurozone banking system is on the edge of collapse. Specifically, the problem is related to a lack of acceptable collateral, or ‘collateral crunch’, for overnight and other short-term bank funding (emphasis added): Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding. The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a ‘collateral crunch’ was looming. “If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank. Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as U.S. Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. Izabella Kaminska at FT Alphaville wrote about this story early and has covered it well. She wrote that the problem is becoming so acute that even the Bundesbank is running out of money. While policy is decided centrally, actual enforcement and implementation of that policy is conducted on a national central bank (NCB) level. Generally speaking, the system ensures that all NCBs carrying surpluses channel them over to NCBs carrying deficits. The problem is that since the crisis unfolded, the number of NCBs handling deficits has started to outnumber the number of NCBs holding surpluses. One particular NCB — the Bundesbank — has become a sort of lender of last resort for the whole Eurobanking system. –Seeking Alphaemphasis italicized or added
Alpha lists the stock charts from four very stressed European banks, which it calls the Four Horsemen of the Euro Banking Apocalypse:
(left) Commerzbank- 2nd largest bank in Germany and (right) Crédit Agricole- the largest retail banking group in France
(left) Société Générale – large European bank based in France whose credit rating was cut to A1 by Moody’s Dec. 8th. (right) Banca Intesa- Italy’s largest bank and Europe’s third largest in terms of assets.
The coming storm: According to the website Bankorrealestate.com, the four largest U.S. banks are in much worse shape than even their European counterparts. J.P Morgan Chase is believed to be carrying as much as $78 trillion dollars in derivative debt, Citibank is said to have $56 trillion, Bank of America is said to have $53 trillion and Goldman Sachs is believed to have $48 trillion. According to BOR’s report, U.S. banks are over-leveraged by debt-to-asset ratio somewhere around the tune of 50:1. It might be worth mentioning that the GDP of the entire world for one year is only $100 trillion and the largest U.S. bank is almost carrying that much is debt exposure. Meaning banks have almost no real money in them, only IOU’s and enough government-printed cash to keep the fiat pyramid scheme going for yet a little while longer until the whole system is so over-stressed with debt that it eventually crashes. – See BOR
Finally, when we hear a conservative news outlet like Reuters doing a segment about a complete crash of the global financial system, perhaps it’s time for all of us to start worrying.