In-depth analysis on Credit Writedowns Pro.

Europe’s Other Bank Problem

By Global Macro Monitor

One would think the following chart has a data error. Not so.

Europe is way over banked and the chart illustrates the monumental task and cost of recapitalizing some of their largest banks. The size of the largest four banking institutions in France, for example, represents over 300 percent of the country’s GDP. The markets will monitor carefully the sovereigns’ incremental obligation of the new recapitalization plan. They need to be careful not to turn France into Ireland, for example, which will definitely be game over for the Euro. Stay tuned.

P.S. Long Swissie during a European banking crisis? No thanks!

Also see:

About 

Global Macro Monitor is a site designed as a “go to” source for traders, investors, policymakers and any interested in markets and the global economy. It provides informed opinion, timely market information, sources, and links.

19 Comments

  1. Claus Heimann says:

    I assume that the chart shows banks assets in pct of GDP?

  2. I second Claus Heimann’s question: what does the chart actually show?

  3. ChrisBern says:

    I did a spot-check of a few of them (France and Switzerland), and yes I would it looks like it’s bank assets…that looks approximately correct. The chart and description is on pages 58 and 59 of this Treasury report, but lent no further details: http://www.treasury.gov/initiatives/fsoc/Documents/FSOCAR2011.pdf

    Anyhow, that’s an amazing chart, and clearly illustrates how difficult it will be to put into practice that which Merkel/Sarkozy casually announced they both supported last weekend (recapitalizing the banks).

  4. Unless we assume that all bank assets are likely to face heavy downgrades (which is a possibility), the chart does not contain sufficient information to be meaningful.
    Surely, if you have trouble in the banking sector it would not only be the four largest banks that needed recapitalisation. What is total banking assets compared to GDP for these countries?
    Still, the conclusion holds that most countries will find once recapitalisation is required in substantial parts of the banking sector their banks are actually too big to be saved.

    • David Lazarus says:

      Yes but such losses depends on a breakdown of lending. For example Germany and France have not really experienced substantial property bubbles so that element of their balance sheets looks good. The UK and Netherlands have had a property bubble so they could face big losses. From what I remember of UK bank lending 79% was attached to property both commercial and residential. Commercial property write-offs might be complete but residential write-offs are far from complete. Breaking banks up so that even the biggest is not too big to save would allow central banks to take over distressed banks more easily.

  5. Sid says:

    Is it really fair to compare US and European financial institutions? The US primarily relies on the bond market for funding, so bank assets may consist of loans, mortgages etc but the ‘burden’ of capital is also provided by funds, SIVs etc.

    In Europe, financing is primarily in the form of bank loans. There is no pan-European bond market like as deep and wide as the US.

    A fairer comparison would be corporate / financial / household debt per GDP by country. In which case there is not much difference – they are all screwed.

  6. Thomas DW says:

    My understanding, which may very well be wrong, is that because of historical regulatory reasons (in particular linked to state-level licensing), the US is an incredibly fragmented banking market. This does not mean that the US is less “banked”, just that more players compete for the banking $$$s.

    You should probably show European Top 4 banks as a % of European GDP, which would be closer to a fair comparison…

    • David Lazarus says:

      Not really because each european bank could be much larger to its national economy. The US has more banks and more diversity but Europe’s banks are big and very big in relation to the nations that are supposed to back them in a crisis.

      • Right. I interpret this chart as a good representation of the Irish or Icelandic problem i.e. the size of the largest banks compared to GDP is a good baseline indicator of the sovereign’s ability to credibly backstop (bail out) those banks in a liquidity or solvency crisis. If the banks are too large, the sovereign credit becomes impaired.

      • David,

        Taking this a step further, we just need to ask ourselves if Switzerland could credibly backstop UBS and Credit Suisse or if Denmark could credibly backstop Danske Bank. The answer is no. If these banks were to fail, you would have the Icelandic problem:

        http://www.creditwritedowns.com/2008/11/iceland-cautionary-tale-for-small.html

        “Iceland was a small country with a very large banking system. This has meant the country is simply not big enough to bail out its banking system. Other countries with similar problems dot the economic landscape, the UK and Switzerland being two very prominent examples (see related posts below for more details).”

        Also, these numbers tell you that in some countries, the banks have a significant chunk of their asset base overseas, which makes cross-border bank resolution a sticky wicket were they to fail. Supposedly this was the issue in not allowing Citi to fail. It would be the same issue for Denmark if Danske Bank were shut out of the interbank market. In that case, could Denmark credibly backstop the bank. I say no.

        Read Danielsson’s piece linked above. He makes similar arguments. And that’s also why the Swiss have imposed higher capital requirements on their banks.

        • David Lazarus says:

          But traditionally the Swiss banks were also the most prudent of banks as much of their deposits were not risk assets. If the big Swiss banks were to have further problems they could not be bailed out so would collapse, they and the Swiss regulators know that.

          • Agreed. The two big Swiss banks have lost their way. Swiss politicians feel shame for the disrepute they have brought to that sector of the Swiss economy and the damage it has done to Switzerland’s reputation. I expect UBS to suffer more regulatory scrutiny because of this.

          • David Lazarus says:

            At least the Swiss are ahead of the curve on this matter. The rest of Europe are well behind. The UK does have higher capital levels than the rest of Europe but that ignores the huge risks that the UK banks are running in the derivatives, which could wipe them out very easily.

          • Bottom line: these giant banks are simply too big. And it’s a good thing that higher capital requirements are causing them to want to shrink rather than raise capital.

          • David Lazarus says:

            Hiving off the risky aspects of investment banking might also reduce their risk capital needs even further. It might be profitable business but it carries the extra cost for capital requirements.

            Overall, do companies need such big banks? I think not. I suspect that they would prefer more competition in terms of service and fees.

  7. Don says:

    There are several limitations with this chart which make interpretation difficult. The main limitation is that just because a bank is based in country x, doesn’t mean that this balances sheet consists of loans to individuals/businesses in that country (e.g. HSBC). It is unlikely the government of country X would guarantee all the banks liabilities, only the ones that relate to domestic legal entities would likely be relevant.

  8. M says:

    I’m a little bit sceptical of this chart really, in of itself, showing that Europe is ‘over-banked’. All it shows is that the largest 5 banks in European countries are far bigger in terms of assets as a proportion of GDP, which is certainly true. But if you wanted to look at ‘over-banking’, you should look at all banking assets, not just the top 5.

    So it could well indicate an ‘over-banking’ problem, but what it really shows is a concentration problem.

    • Agree, especially given the relative greater dependence on banks as financial intermediaries in Europe versus the US. The chart does show a large amount of cross-border assets for some banking systems (France, UK, Switzerland, Sweden, etc) in addition to the concentration problem.