Reports of European Banking Crisis Increase as Depositor Bail-In Looms

17th August 2016 / EU

By Graham Vanbergen – Back in September 2015 we published an article “Grand Theft Auto – UK and EU Bank Depositor Bail-In Regime Implemented” where we described how banks throughout the EU would simply steal depositors money if any of them failed now that new bail-in rules had been implemented.

The first paragraph stated “Shares and stocks are tumbling around the world, with investors worried that the next global crisis has already begun. There is considerable uncertainty and nervousness amongst economists and trend forecasters. Government’s sooth jittery markets with misinformation in the hope that confidence does not evaporate and their legitimacy with it.”

On the first day of 2016 all banks located within the EU follow the ‘Anglosphere’ nations of Britain, America, Australia, New Zealand and Canada into an agreement, where the next bank failure and bail-in could cost depositors a large slice of their money.

In 2014, six years after the last financial calamity, one in five European banks failed basic stress tests that would see bankruptcy on the first hint of trouble. What did they need just to get past that stress test? Twenty four billion euros.

One should not forget that the Bank of Cyprus passed its stress test with flying colours just before it crashed and burned. That bail-out and bail-in came in at €23 billion to the taxpayer but it also took 47.5% of depositors money over €100k as well.

Think it won’t happen to British Banks? This from the Financial Times last year “The Bank of England’s stress tests of the banking sector have been attacked as “fatally flawed” for setting hurdles that are too easy to clear and giving false comfort about the safety of the financial system.”

A report published by the Adam Smith Institute (ASI), a free market think-tank, calls for the BoE annual stress tests to be scrapped, arguing they are “worse than useless” because they disguise weakness in the UK banking system.

This year, the ASI’s warning made for even worse reading with The Independent just last week reporting that the UK is heading for a new financial crisis ‘on grander scale than 2008’ with the Bank of England ‘asleep at the wheel’. Comforting news after eight years of austerity.

As all banks are interconnected a single failure could cause a domino effect the same as the famous Lehman Brother collapse, albeit that the one domino that falls would need to be a decent sized one.

So how are Europe’s banks are coping in the new normal?

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Five months ago Spain was back in the papers after its massive tax-payer bailout and nearly €250billion in provisions in the early days of the banking industry crisis. Banks are now requiring more bailouts with shares now trading at 26-year lows. Banco Popular is leading the charge with a balance sheet made up of toxic junk, a cash shortfall into the €billions and new rules means it needs to make provisions of some €7billion just to comply.

One month after that Portugal, which the International Monetary Fund has linked with the problems facing Italian lenders as among strong risks to global growth, is now facing yet more government response as debts fail to leave its balance sheets. The Bank of Portugal requires €30billion just to cover bad debts and is again looking to the tax-payer for survival.

Two months ago as Britain’s decision to exit the EU became known the first shock waves became apparent. This from ZeroHedge: “From Italian bankscrashing over 25% to British banks being halted, trading at record lows, to Deutsche Bank extending its Lehman-esque trend, as one veteran stock market trader in London said, “it’s a f##king bloodbath, not even Draghi can save this one.” The contagion is spreading however as UK defaul risk has spiked to 3 year highs and USD liquidty needs are surging with funding markets seeing serious distress.”

One month ago – again from ZeroHedge: “EU Banks Crash To Crisis Lows As Funding Panic Accelerates. Europe’s banking system is collapsing (no matter what Draghi has to offer). From record lows in Deutsche Bank and Credit Suisse to spiking default risk in Italy’s Monte Paschi bank, the panic in Europe’s funding markets is palpable.”

Also one month ago, the International Monetary Fund (IMF) labelled Germany’s Deutsche Bank as the most risky financial institution in the world. Apart from failing various stress tests, Western experts are warning that the bank could share the destiny of Lehman Brothers and go bankrupt causing a global collapse.

Two weeks ago it was reported “Forget the adverse scenario bit, Monte dei Paschi, Italy’s third largest bank and oldest bank in the world is insolvent in any realistic scenario.” It is short by €50billion and collectively the Italian banking system has €360 billion in nonperforming loans.

Today, we now see deposit bail-in risks slowly being realised in Ireland, after it emerged that FBD, one of Ireland’s largest insurance companies, have been moving cash out of Irish bank deposits and into bonds.

Revelations regarding deposit bail-in risks came in the wake of warnings of a new property crash centred on the housing market in Ireland. The former deputy governor of the Central Bank warned in an op-ed in a leading international financial publication, Project Syndicate, that Ireland is at risk of another housing market crash.

As Goldcore reported just yesterday with reference to Ireland “The new deposit bail-in mechanism is designed to protect banks and is touted as a way to prevent taxpayers being liable for bailing out collapsed lenders. It is believed that it leaves bank bondholders and deposit customers with more than €100,000 on deposit at risk of footing the bill.”

Then the IMF warns that banks “In particular, Germany, France, the UK and the US have the highest degree of outward spillovers as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country.”

And here’s a thought when it comes to that IMF warning.

In 2007, Lehman had a leverage (the ratio of total assets to shareholder’s equity) of 31-to-1. At the time that Lehman filed for bankruptcy, it had $639 billion in assets and $619 billion in debt and still, it caused a systemic risk that threatened the global banking system.

In comparison, Deutsche Bank today has a mind-boggling leverage of 40-times, according to Berenberg analyst, James Chappell. He stated, “facing an illiquid credit market limiting Deutsche Bank’s ability to deliver and with core profitability impaired, it is hard to see how [Deutsche Bank] can escape this vicious circle without raising more capital. The CEO has eschewed this route for now, in the hope that self-help can break this loop, but with risk being re-priced again it is hard to see [Deutsche Bank] succeeding.”

After being caught hiding debt to the tune of €8billion, raised finance to the tune of €12.5billion Deutsche Bank shares are now trading at 30-year lows. It’s already wobbling.

Shares drop to 30-year low (Image Bloomberg)

Shares in Deutsche Bank drop to 30-year low (Image Bloomberg)


As TheStreet reported just a few weeks ago “The nominal value of derivatives risk that Deutsche Bank holds on its books is $72.8 trillion, according to the banks’ April 2016 earnings report. What is astounding about this, is that a single bank owns 13% of the total outstanding global derivatives, which was a staggering $550 trillion in 2015.”

What is apparent though is that the nominal value of derivatives exposure does not mean that Deutsche Bank will have a default worth trillions of dollars. This is because most of the derivatives contracts are covered by counter-parties – this is where the domino effect takes place and all hell would break loose. And if that were to happen, Germany with a GDP of $3.7 trillion and the EU with a GDP of $18 trillion representing 26 per cent of the world economy, will not actually be in much of a position to gain control over what happens next.



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