Earlier today Josef Ackerman the pugnacious CEO of Deutsche bank, speaking at a banking conference in Frankfurt said,
“Numerous European banks would not survive having to revalue sovereign debt held on the banking book at market levels.”
Later, the CEO of Dexia, Belgium’s largest and most deeply troubled bank, resigned. The reason suggested by Belgium’s Het Nieuwsblad newspaper is friction between the Belgian and French arms of the Franco/Belgian bank. And so it might be. But the paper does also admit that Dexia is having a crisis of confidence with its investors and creditors.
I suggest the timing with Akerman’s comments may be more relevant for this reason ;
When Greek started on its road to default Dexia was in the spot light because of its exposure to Greek debt. Debt that Greece has now begun to default, asking bond holders to exchange bonds for new bonds at a loss of around 20%. But Dexia’s exposure to Greek bonds is one fifth of its exposure to Italian bonds.
Dexia is sitting on 15.5 billion Euros of Italian sovereign debt. The point of Ackerman’s comment is this. Like ALL European banks it is holding all that debt on its Banking Book, meaning it is holding it all at 100% face value because – and this is a wheeze the ECB invented for the banks some while ago – it intends to ‘hold them to maturity’. And the idea is that if you are going to hold a bond to maturity, then you do not have to mark the bond to the value it might have on the secondary markets.
And thus every European bank transferred as many assets as they could from the trading book where they would have to be valued at the market price, to the Bank book where they could be put in a glass case.
But now comes Ackerman to fart loudly in Dexia’s face in public. Imagine what would happen to Dexia if 14 billion euros of Italian bonds did have to be taken from their glass case and valued. Impossible?
Think of all the other news out of Italy today and then take a look at that chart again.
I leave it to you.
Yes!
The boy, sorry, Palace tailor, who said the King was NAKED!
I can see this ending well.
Test?
So the question Dexia's shareholders must be nervously asking themselves today is "Do I feel Lucky?"
Is this another example of Mark to Model you spoke of before?
Second question which still wondering about.
Evidence is that large deposits are being transferred from European Banks to the US. Usually to their US subsidiaries. Is there an obvious reason why they would to do that? Surely it makes their home capitalization weaker?
It would seem its a safety net but in what way? Is it that they need to continue interbank lending but dont trust the other European Banks? And actually see America as safer?
Any view on that?
@wirplit I could be wrong, but I would have thought that European banks are moving deposits they hold at other European banks to the US, not their own.
Of course, if they all held their deposits in Europe they could all keep their capitilisation levels higher and would all be winners but it only takes one or two to get twitchy and the race to the exit begins.
On the positive side (for the banks) if all that's left in the European banks is worthless junk, all the primo assets having been transferred to the US, then the EU/ECB/IMF will have no choice but to bail them all out again i.e. replace all that junk with cash or bonds, to once again prevent a catastrophe of biblical proportions, fire raining from the sky, cats and dogs living together and etc, etc, yadda, yadda, yadda…