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
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.”
“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
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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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More fun stuff:
- Please, Don’t Mention “Contagion”!
- IMF Director Christine Lagarde Sees “Crisis of Confidence”
- The Worlds Most Contagious Countries – Here’s The List
- Europe In Debt (Part 1): Creating a Monster
- Europe In Debt (Part 2): Poisonous PIIGS With Toxic Lipstick
- Europe In Debt (Part 3): Exit On Main Street
- In The Bright Minds Of IMF
Other possible related articles:
- IMF admits mistakes on Greek bailout (bbc.co.uk)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
- ‘Masters of Austerity’ Targeted as Blockupy Activists Shut Down European Central Bank (commondreams.org)
- German banks can´t withold Dibabank (yournovelty.wordpress.com)
- Brussels fights back in Greek crisis blame game (guardian.co.uk)
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EconoTwist's 
Anti-Austerity: London’s Burning
The old classic hit by Clash “London’s Burning” comes to mind reading the news report from London this afternoon. More than 250.000 people have attended a march and a rally in central London against public spending cuts. But small groups attacked shops and banks with a stand-off in Piccadilly. There have been 202 arrests and 35 people injured, including five police, according to BBC.
“We will fight the savage cuts and we will not let them destroy Peoples’ services, jobs and lives.”
protester
The main march was organised by the British Trades Union Congress (TUC), who also helped organizing last weeks protests in Brussels. Labour leader Ed Miliband addressed the crowds in Hyde Park, the largest public protest since the Iraq war rally in 2003, saying : “The Tories said I should not come and speak today. But I am proud to stand with you. There is an alternative.”
TUC general secretary Brendan Barber was first in a line of speakers:
“We are here to send a message to the government that we are strong and united,” he said.
“We will fight the savage cuts and we will not let them destroy peoples’ services, jobs and lives.”
BBC political reporter Brian Wheeler, in central London, says there were lots of families and older people, and the atmosphere was good-natured but the anger was real.
“The noise in Whitehall was deafening as thousands of protesters banged drums, blew whistles and shouted anti-cut slogans, slowly making their way towards Trafalgar Square,” he reports.
Adding: “The crowds were booing as they went past Number 10, but the demonstration was good-natured and friendly.”
“There are hundreds of trade union banners, but we have also spoken to public sector workers who have come to make their voices heard.”
One of those protesting was Peter Keats, 54, from Lowestoft, Suffolk, who works for Jobcentre Plus.
He says: “Personally, “I think it’s wrong the way we are hitting the poor. I’m not so much worried about myself but the customers I deal with are vulnerable and I’m worried about them and I’m worried about the kids of this country.”
Demonstrator Christine Nugent, a university research fellow, says: “The size and scale of it, and the range of people here, is great.”
The veteran of anti-Margaret Thatcher demonstrations in the 1980s said protesters came from all walks of life, adding: “There are a lot of trade unionists here, but it’s not just the usual suspects.”
Scotland Yard says there had been 202 arrests for public order offences, criminal damage, aggravated trespass and violent disorder.
Mr Barber was followed by Mr Miliband, who said: “The Tories said I should not come and speak today. But I am proud to stand with you. There is an alternative.”
The march began at 1200 GMT and it took more than four hours for the protesters to file past the Houses of Parliament on their way to the park.
But small groups attacked shops and banks with a stand-off in Piccadilly. There have been 202 arrests and 35 people injured, including five police.
Ministers say the cuts are necessary to get the public finances in order.
Commander Bob Broadhurst said: “The main TUC march has been going well. We have had more than a quarter of a million people with hardly any problems. Unfortunately we have had a group of approximately 500 criminals committing some disorder including throwing paint at Topshop in Oxford Street and at the police, and scaring the public who are trying to shop.”
Policing minister Nick Herbert said the government was “committed to supporting peaceful protest” and blamed the violence on “a small minority of individuals”.
Mr. Miliband condemned the violence, saying: “There is no excuse for it. It is unlawful and wrong.”
Civil rights group Liberty said the march had been “infiltrated by violent elements” who attacked buildings before “melting into the demonstration once more”.
Earlier, the largest union involved, Unite, says so many of its members had wanted to take part that it could not find enough coaches or trains to ferry them to London.
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