Tag Archives: Commerzbank

European Crisis Not Contagious – Banks Are

The International Monetary Fund (IMF) have released a stack of reports and papers over the last couple of days, including the one stating that the Greek bailout operation has been more or less – a fiasco, so far. But there’s more: New research indicates that the international banking  is continuously increasing their risk taking and that more any more trouble with the European banks may have severe spillover effects on  financial institutions outside Europe,

“Both German and French banks mostly transmit/receive shocks to other European banks, especially in the UK. French and U. banks pre-crisis also appear to have strong spillover to Russia. Outside of Europe, spillover are largely confined to the US.”

Hélène Poirson/Jochen Schmittmann

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The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any globalization of the euro area crisis is likely to be channelled through UK. and US banks, the research paper says.

The report “Risk Exposures and Financial spillover in Tranquil and Crisis Times: Bank-Level Evidence” provided by Hélène Poirson and Jochen Schmittmann was released yesterday in the shadow of IMF’s Greek audit report.

(Transcript of IMF press briefing on Greece here.).

This report is not necessary reflecting the official IMF view, but provides some interesting details on who will influence who if more trouble occur.

The researchers have discovered a clear pattern of interconnectedness between European banks.

“French and German banks co-move strongly only with selected US financial institutions, while UK banks are connected strongly with both Asia (pre-crisis only) and the US (in both periods).”

“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

12579631569zN4br“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

Moreover, the researchers have mapped the connections between the individual institutions.

“The estimation framework allows us to highlight the presence of “clusters” of interconnected banks that tend to co-move together more strongly than with other banks, either due to inter-bank linkages (counterparty relationships, interbank-lending) or the exposure to common vulnerabilities.”

A few examples

german spillover

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french uk spillover

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  • Large German banks appear to co-move strongly either with other German banks or with other European banks.
  • Spillover from German banks to other European banks are most pronounced in the case of French and U.K. banks and, to a lesser extent, in the case of Dutch, Belgian, and Swiss banks.
  • During the subprime crisis and in the post-crisis period, a Franco-German cluster can be detected comprising Deutsche Bank and BNP Paribas and a UK-German cluster comprising Commerzbank, Barclays, and RBS.
  • None of the banks from peripheral crisis European countries (GIIPS) are found to co-move in a significant way with the largest German banks.
  • Spillover from German banks to other regions appear limited to the US: prior to the subprime crisis, two of the large German banks seem to co-move significantly with banks in the U.S. (namely, Deutsche Bank with Lehman Brothers and Hypo Real Estate with Goldman Sachs)25; during and following the subprime crisis, Freddie Mac and Fannie Mae have synchronized returns with the largest German financial institutions (Deutsche Bank, Commerzbank, and Allianz), which in turn can be traced back to the latter’s sizeable holdings of subprime portfolios and related exposures to US real estate.

Conclusions

“Similar to German banks, the spillover of French banks to other regions are largely limited to U.S. financial institutions and can only be detected since the onset of the subprime crisis.”

“The financial spillover of U.K. banks, by contrast, reach beyond Europe in both periods. Pre-crisis, there is empirical evidence of strong co-movement of US, Indian and Chinese banks with U.K. banks; during the subprime crisis and post-crisis, spillover to U.S. banks are dominant and the analysis does not detect any co-movement with banks in other regions.”

“In summary, we can tentatively conclude from the analysis of bank-level spillover that direct financial spillover from the EA banking and sovereign debt crisis transmitted through the equity markets outside of Europe are likely to be confined to US banks and financial institutions. Indirectly, however, given the role of the US as a global financial hub, such spillover – if they were to intensify – could potentially transmit more widely to systemic banks in other regions (Asia, Latin America, and Middle East).”

“The analysis in this study leaves unspecified the channels of transmission of financial spillover both within countries and across borders. While this undertaking is beyond the scope of this paper, it would be an important avenue for further research.”

Definitively!

(Download the full report here.)

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“Major Banks Could Fall Within Weeks”

I guess there was a 50/50 chance: The EU would have to pull out the big bazookas in order to stem the panic in the financial markets, or they could continue the strategy they’ve seemed to be following for quite some time now; keep on treading the water and hope for the problems to go away. Unfortunately they have chosen the last alternative.

“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.”

Bank Executive, London

 

And the first one may very well be the German bank giant, Commerzbank, according to SPIEGEL ONLINE.  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 Telegraph writes.

The European Central Bank confirms it has held meetings about providing emergency funding to the region’s struggling banks, but British financial experts, however, says a “collateral crunch” is looming, British news paper The Telegraph writes on its web site.

“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,” says 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 US 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.

“The system is creaking. There is a large amount of stress,” says Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.

The German paper, Der Spiegel, reports that Berlin is considering a full nationalization of the nation’s second largest bank if necessary.

“According to government sources, if Commerzbank doesn’t manage to raise sufficient capital on its own by next summer, Berlin will reactivate the Special Fund for Financial Market Stabilization (Soffin) and purchase additional shares in the bank. The sources say that they assume the government would acquire a majority of the bank’s shares in a capital increase,” SPIEGEL ONLINE writes.

Adding:

“But things haven’t reached that stage yet — and they won’t necessarily have to, either. Commerzbank management is working round the clock to solve the problem without government aid. It’s a difficult job that will mainly have to be tackled by the new Chief financial Officer, Stephan Engels, who was appointed by the supervisory board last Friday.”

If Commerzbank fails to meet the challenge, though, Commerzbank CEO Martin Blessing’s days at the head of the commercial lending giant may very well be numbered.

“I’m not going there again,” he recently said, in reference to a government bailout of €16.2 billion ($21.7 billion) that the bank received in 2009. His statement was not well received in Berlin.

Well, let’s do a poll,,,,

CreditSights’ weekly funding report says the ECB had effectively become the central clearer for the region’s banks as lenders are increasingly distrustful about funding one another.

Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank.

At the same time, banks in major euro zone countries such as France and Italy have become increasingly reliant on central bank funding.

This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded “zombie” banks.

Alastair Ryan, a banks analyst at UBS, said there would be “no Lehman moment” – or single catastrophic event – for the European banking system, but added that without a full backstop of bank liabilities by governments the system would “struggle to finance itself in the next year in a durable way”.

In other words: We may not have a “Lehman collapse” (times ten) in Europe, but rather an “AIG scandal” of unprecedented proportions.

“The system at the moment hasn’t got funding of a duration that allows it to function, so it’s failing,” Alastair Ryan concludes.

Ladies and Gentlemen; take your (short) positions!

And just for the fun of it – here’s a shrt summary of this “make-or-break” summit in Brussels:

What the EU leaders agreed on

A new EU20, EU26 or EU-something-in-between treaty on financial discipline.

A more market-friendly bail-out fund.

Funneling more EU money back to the EU via the IMF.

Eurobonds, maybe, in the long-term.

More summits,

What the EU leaders did not agree on

No new EU treaty.

No big bazooka.

No ECB money-printing.

Remaining questions

Will the ECB buy more bad debt?

What bits of the new treaty will apply to whom?

What will the EU institutions do?

How will the EU bail-out fund make its decisions?

Will there be EU-wide taxes?

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