The Eurozone Banks’ Trillion-Euro Timebomb

(Source: Bloomberg, Bologna, Miglietta, Segura)

 

Eurozone banks have fallen dramatically in the stock market despite the results of the stress tests carried out by the ECB, and the EU Banks Index is down 25% on the year despite year-long bullish recommendations from almost every broker. This should not surprise anyone because we have seen in the past that these tests are only a theoretical exercise. Moreover, stress tests’ results are widely challenged, and rightly so, because the exercise starts with the most ridiculous premise in economics: Ceteris Paribus, or “all else remaining equal”, which never happens. Every asset manager knows that risk builds slowly and happens fast.

Is Deutsche Bank Kaputt?

It looks like Deutsche Bank is heading toward failure. Why might we be concerned?

The problem is that Deutsche is too big to fail — more precisely, that the new Basel III bank resolution procedures now in place are unlikely to be adequate if it defaults.

Let’s review recent developments. In June 2013 FDIC Vice Chairman Thomas M. Hoenig lambasted Deutsche in a Reuters interview. “Its horrible, I mean they’re horribly undercapitalized,” he said. They have no margin of error.” A little over a year later, it was revealed that the New York Fed had issued a stiff letter to Deutsche’s U.S. arm warning that the bank was suffering from a litany of problems that amounted to a “systemic breakdown” in its risk controls and reporting. Deutsche’s operational problems led it to fail the next CCAR — the Comprehensive Capital Analysis and Review aka the Fed’s stress tests – in March 2015.

Bank of Cyprus Depositors Hand Over 47.5% in Bail In-Source

ATHENS–Large deposit holders at Bank of Cyprus PCL (BOCY.CP) will see almost half of their deposits turned into equity at the lender as part of the country’s international bailout, a senior bank official said Sunday.

After an all day meetings Saturday between President Nicos Anastasiades and representatives from the country’s creditors–its euro-zone partners and the International Monetary Fund–it was decided that 42.5% of all deposits over 100,000 euros ($132,764) will be converted into shares as part of its recapitalisation plan, the official said.