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European banking collapse including nationalisation of three banks

UPDATE: 9:30 AM ET: This post has been updated to reflect the events surrounding Fortis.

On Friday, I warned that European government officials like Peer Steinbrück of Germany should refrain from chastising the U.S. and the U.K. over problems in banking. After all, Europe is next. At the weekend, the fireworks in Europe began in earnest. Yesterday, top German finance blogger Egghat sent me an email, warning me that “Hypo Real Estate (DAX component) reportedly [was] in severe liquidity problems.” He said, echoing my sentiments of Friday, “so much for Steinbrücks and Merkels Schadenfreude last week.” His post in German on Hypo is here.

Then, we awoke his morning to the nationalisation of Bradford & Bingley by the UK Government, of which I warned on Friday, the partial nationalisation of Fortis in the Benelux and the nationalisation of Glitnir Bank in Iceland, that country’s third largest bank. Needless to say, European markets are seeing heavy selling with the FTSE in the UK down 3% and the DAX in Germany down over 2 1/2%. With the U.S. Government bailout, things have not stabilized. The BBC reports on the B&B nationalisation, the Glitnir and the Hypo Real Estate situation as well. On B&B, they say:

Mortgage lender Bradford & Bingley (B&B) is to be nationalised, the government has confirmed.

The government will take control of the bank’s £50bn mortgages and loans, while B&B’s £20bn savings unit and branches will be bought by Spain’s Santander.

Under the move, all B&B savings accounts are protected, and taxpayers are being shielded from any losses.

B&B is just the latest bank that has needed rescuing in a turbulent period for British financial institutions.

It follows after the announcement two weeks ago that HBOS is being bought by Lloyds TSB, and Nationwide’s takeover of smaller building society rivals Derbyshire and Cheshire.

Prime Minister Gordon Brown said the move showed the government would “do whatever it takes to ensure the stability of the UK financial system”.

The move also came on another eventful day of global financial turmoil:

  • Wachovia, the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
  • Benelux banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
  • The Icelandic government took control of the country’s third-largest bank, Glitnir, after the company had faced short-term funding problems
  • Shares in Europe and Asia fell sharply, while in the US, Congress voted on a $700bn (£380bn) plan which aims to bail out Wall Street and ease the credit crisis.

‘Lost confidence’

“Following recent turbulence in global financial markets, Bradford & Bingley has found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution,” said the Treasury.

It added that the move would protect savers’ money and that B&B’s branches, call centres and internet operations would “be open for business as usual to provide continuity of service to customers”.

BBC business editor Robert Peston said it was a good deal for taxpayers, and that the risk was “quite close to nil”.

Under B&B’s nationalisation, taxpayers are being protected from any losses because of the Financial Services Compensation Scheme.

This means that if B&B’s remaining assets prove insufficient, the balance will ultimately be paid by the wider UK banking sector, although Chancellor Alistair Darling said that possible scenario remained a long way down the line.

Shadow Chancellor George Osborne told the BBC that he would study the exact details of the deal, but that protecting taxpayers had to be the main priority.

‘Good news’

Abbey, which is part of Spanish banking group Santander, is paying £612m to buy B&B’s savings business and 197 branches.

Abbey chief executive Antonio Horta-Osorio said the acquisition of B&B’s bank’s savings account was “good news” for customers.

“They can be certain that their hard-earned savings are with a bank they can trust.”

To help facilitate Abbey’s takeover of B&B’s savings business and branches, it has been paid £14.6bn from the Financial Services Compensation Scheme – funded by the Bank of England – and a further £4.5bn from the Treasury.

This £19.1bn is to guarantee that Abbey could pay back all B&B savings account customers, if need be.

The government says it will get the money back – starting with the Treasury’s £4.5bn – following the redemption and sale of B&B’s mortgages, that are now in public hands.

A spokeswoman for Abbey said while it was “business as usual” for B&B’s branches, it was too early to say whether any would close in the long term.

However, with Santander already owning both Abbey and Alliance & Leicester, it appears likely that there will be some branch closures.

And the B&B, which currently has about 3,000 staff, has for the time being stopped offering any new buy-to-let or self-certified mortgages through its internet business Mortgage Express.

The company told mortgage brokers it was “working through the full ramifications” of the nationalisation.

Funding problems

B&B is the second UK bank to be nationalised since the start of the global credit turmoil, following Northern Rock’s move into state ownership in February this year.

Speculation had intensified in recent weeks that B&B was approaching a funding crisis, leading to a growing number of customers withdrawing their funds.

B&B got itself into financial difficulty as a result of the credit crunch removing the option of raising funds through the global wholesale money markets.

Its problems were then further intensified by its focus on the buy-to-let market, which has seen a large rise in bad debts as UK house prices have fallen.

B&B has also struggled to fund a number of takeovers.

-BBC News

In the Benelux countres, Fortis has come under the greatest pressure of late, with questions about solvency coming to a head last week. The government has now decided to step in:

Three governments nationalized banking and insurance group Fortis in a bid to avert U.S.-style financial contagion, but the European sector’s troubles appeared to be spreading on Monday.

The Belgian-Dutch company’s stock rose when markets reopened after a weekend of high drama, but the gains were wiped out in hectic trading as bank shares across Europe fell despite agreement in the United States on a US$700-billion rescue plan.

Shares in Fortis rival Dexia plunged 20% after a newspaper report it planned a capital increase. German property lender Hypo Real Estate plummeted 61.5% after it secured an emergency credit line from a consortium of banks and a substantial government guarantee.

In Britain, mortgage lender Bradford & Bingley became the second British bank to be nationalized since the global credit crunch began last year.

After emergency talks with European Central Bank president Jean-Claude Trichet on Sunday, the Belgian, Dutch and Luxembourg governments agreed to inject 11.2-billion euros (US$16.4-billion) into Fortis in the first major bank crisis to hit the euro zone in 13 months of global turmoil that began in the United States.

“One can call it nationalization, in another kind of way,” Belgian Finance Minister Didier Reynders told RTBF radio.

Fortis will sell the parts of Dutch bank ABN AMRO it bought last year to Dutch rival ING in a deal expected to be finalized within two weeks, sources familiar with discussions told Reuters. ING declined comment.

“Integrating ABN AMRO was a step too far for this company to do,” new Fortis CEO Filip Dierckx told a conference call.

The European Commission said Competition Commissioner Neelie Kroes was consulted on the Fortis rescue and was in close touch with the Belgian government all weekend.

“We will look at any state aid involved as a matter of urgency,” EU spokesman Jonathan Todd said. Under EU rules, rescue aid must be limited to six months and to the minimum required to ensure the company’s survival.

How the EU regulator handles the case will depend on whether the governments buy shares at the market price or inject new capital into the bank.

FIRE SALE AVERTED

Reynders said the Benelux governments opted for the partial nationalization to avert a fire sale of the company, which employs 85,000 staff, after investor confidence collapsed last week and two private bidders offered paltry terms.

“We could have not intervened, but the question was whether Fortis would have survived on Monday,” Dutch Finance Minister Wouter Bos told reporters.

Each government will take a 49% stake in Fortis banks in their respective countries. Belgium will put in 4.7-billion euros, the Netherlands 4-billion euros and Luxembourg 2.5-billion euros, the latter in the form of a convertible loan.

Fortis said in a statement it expected total negative value adjustments of about 5 billion euros after tax in the third quarter. It added its core equity would be around 30-billion euros, resulting in a 9.5-billion euro excess core equity.

Fortis’s Tier 1 ratio would be above 9% under Basel I rules and a capital ratio under Basel II of about 13%.

Fortis also said it was facing an impairment from the sale of the parts of Dutch bank ABN AMRO that it acquired for 24-billion euros last year.

The most likely private bidder for Fortis, France’s BNP Paribas, pulled out after offering just 1.60 euros per share, compared to Friday’s closing price of 5.20, and demanding state guarantees against possible future losses, a source said.

Another source close to the talks said BNP Paribas had offered 2 euros a share and the Dutch ING Group just 1.5. “There was no serious bidder for the intrinsic value of the whole group,” the source said.

The involvement of Trichet, who as ECB head is responsible for safeguarding financial stability in the euro zone, was unprecedented in a commercial bank rescue and underlined the concern for the integrity of the banking system.

Shares in Ping An, China’s number two insurer, slid nearly 10% on Monday on fears it will have to absorb larger than expected losses from its 5% stake in Fortis.

TOO BIG TO FAIL

Fortis’s position as the biggest private employer in Belgium and its cross-border structure made it too big to be allowed to fail. Its nationalization dwarfs Britain’s state takeover of fallen mortgage lender Northern Rock.

Fortis chairman Maurice Lippens, accused by shareholders of concealing the bank’s troubles for too long, resigned.

Fortis’s precursors traded with Catherine the Great and financed the U.S. purchase of Louisiana from Napoleon. Its main constituent bank, Societe Generale, was the chief financier of the industrialization of Belgium and the Netherlands.

The mooted ING purchase of the Dutch operations of ABN AMRO would raise competition issues because the combined firm would dominate retail banking in the Netherlands, experts said.

The problems at Fortis, whose shares dropped by a third last week on investor concerns about its liquidity and funding, stem from last year’s 70-billion euro purchase of ABN with partners Royal Bank of Scotland and Spain’s Santander.

Fortis has been weighed down by its 24-billion euro outlay for ABN in a market that is neither conducive to more capital increases, nor willing to pay for the assets it wants to sell.

-National Post

The Icelandic situation has less detail. The BBC merely says:

The Icelandic government has taken control of the country’s third-largest bank, Glitnir, after the company faced short-term funding problems.

The government has bought a 75% stake in the bank for 600m euros ($860m; £478m) to ensure stability of the bank during the current financial turmoil.

Glitnir is expected to operate as normal and the government said it did not intend to hold the stake for long.

It is the first Icelandic banking nationalisation of the current crisis.-BBC News

And on the Hypo Real Estate case, big news in Germany, the BBC says:

Shares in German lender Hypo Real Estate plunged after it struck a loan deal with a consortium of German banks.

Its share value fell three-quarters to 3.39 euros, and in late afternoon trading was down 73.5%, at 3.57 euros.

Neither the names of the loan banks nor the deal’s value have been revealed but the deal may be worth up to 35bn euros (£27.8bn,$51.21bn) say media reports.

Hypo has been buffeted by the financial markets crisis as it borrows heavily from the interbank market.

It is thought the deal has ensured financing for the Hypo until the end of next year.

“Hypo Real Estate Group will not need to go back to the unsecured money market for its refunding in the foreseeable future,” said chief executive Georg Funke.

-BBC News

I will be looking to update information on these situations as we move forward. See the BBC article links below for the full articles. But, the long and short of these events is confirmation of the global nature of this crisis. This is not a credit crisis contained to the ‘sub-prime’ sector nor is it a ‘U.S.- and U.K.-centric crisis. It is a global credit crisis of similar proportions to the Great Depression and the news cycle on financial sector disruptions and real economy effects is far from over.

Sources
FTD: Hypo Real Estate droht Kollaps – Egghat’s Blog (in German)
Hypo Real Estate droht Kollaps – Financial Times Deutschland (in German)
B&B nationalisation is confirmed – BBC News
Iceland nationalises Glitnir bank – BBC News
Hypo shares crash after loan deal – BBC News
Fortis rescued but bank woes spread – National Post

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.