Facts about banks

by on September 20, 2008 at 7:32 pm in Data Source | Permalink

…the total liabilities of
Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion
euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This
is simply too much for the Bundesbank or even the German state to
contemplate, given that the German budget is bound by the rules of the
Stability pact and the German government cannot order (unlike the US
Treasury) its central bank to issue more currency. The total
liabilities of Barclays of around 1,300 billion pounds (leverage ratio
over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the
news recently, has a leverage ratio of "only" 33, but its liabilities
are several times larger than the GDP of its home country (Belgium).

The Fed has possibly been bailing them out too (not necessarily by intention), as it is likely that some of these institutions had heavy exposure to the weaker U.S. institutions.  Here is the link.  Those failures should also put the U.S. regulatory failures in perspective.  And what would happen if a big U.K. bank were on the verge of failing?  Would the Fed have to step in there too?  Contagion is contagion, as Aristotle once said…

1 Mercutio.Mont September 20, 2008 at 7:37 pm

Yet more arguments in favor of obtaining dual citizenship?

2 IWantCookieNow September 20, 2008 at 7:56 pm

Leverage ratio is not exactly the best measure of risk. At least for the senior debt holders.

Also, in case of emergency, clearly the stability pact would be ignored. It has been ignored already by Germany (for a stupidly minor reason) and it currently is being ignored by France.

3 E. Barandiaran September 20, 2008 at 8:35 pm

As I said in a comment to your last post,since the terms and conditions of the Treasury’s purchase of assets are yet to be set, we cannot discuss the consequences of the proposal. In particular, since it is not yet known how the losses will be distributed and since the sale of assets is voluntary, we don’t know which type of financial institutions will choose to sell assets to the Treasury. Your post focuses on issues that are secondary.

4 DougM September 20, 2008 at 11:00 pm

The bailout (or whatever you want to call it) of AIG was motivated by AIG having sold $300 billion (notional) of credit default swaps to mostly European banks. These banks use the CDS to hedge their mortgage portfolios and are allowed to use them in regulatory capital calculations.

Without AIG on the other side of the CDS portfolio, $300 billion disappears from Europe overnight.

5 Martin S September 20, 2008 at 11:22 pm

@Florian
And, if the German government simply issues a guarantee that will probably not be counted under the stability pact.
The stability pact has silly rules, like if you sell a government asset (privatize a company) that improves your position under the stability pact! To the best of my knowledge the stability pact does for example not take into account guarantees of Germany for the World Bank. The stability pact is a joke from an accounting point of view. If the World Bank defaulted tomorrow that would cause problems for this year, not in the years the guarantees were issued. So if the German government issued a guarantee for Deutsche’s loans it could basically borrow as much as it wanted without affecting the stability pact. That can even solve a solvency problem (as Deutsche can and has to put a value on that guarantee in its books).

Even if the number of their liabilities is correct, what percentage of them come due this year?
And what percentage of that is to the US creditors that are under water? What percentage of it is mortgages in Munich which have all downpayments and there is an efficient system of recourse for mortgages in place in Germany ? For a German mortgage to default you would need not only negative equity (ie housing price decline which is not happening) and the holder of the mortgage to lose their job (unlike in the US where even in recourse states practically there is no recourse in practice [except against rich people]).

6 Jay September 21, 2008 at 2:48 am

cyrano, the question is whether Deutsche hung onto their CDOs or not. If not, too bad for the buyer, but caveat emptor, after all.

7 David Heigham September 21, 2008 at 6:54 am

The most fascinating point in the piece Tyler quotes from is its title “The Beginning of the End Game.”

Thomas Esmond Knox points up that market mood more briefly and eloquently.

Andrew
Any politician who says “The fundamentals of the economy are strong.” should be beaten about the head and shoulders. For more than 30 years it has been pol speak for “OK, the economy is in a mess; but so far as I am concerned it will have to find its own way out because I have no idea of what to do.” (On the other hand if and when any politician finally says “The government can’t do anything useful for the economy right now.” he, she or it should be voted in by acclamation.)

cyrano

Deutsche Bank has been managed like that for years (it has been improving recently). However, see Martin S. There seem to be a lot of fail safes in the way Deutsche Bank is put together.

8 disinterested observer September 21, 2008 at 11:07 am

I usually find Vox to be very good value but I can’t begin to imagine what they are trying to suggest when they say ” The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP.”

Now one of my mortgages is with Barclays and I know that Barclays is only one of the big 6 or 7 UK banks, so what are we supposed to think – the UK is potentially insolvent to an enormous extent?

Well GDP is an annual flow while liabilities are a stock.

So I am disappointed with Vox for senationalising an important issue.

9 Economist September 21, 2008 at 6:52 pm

@Martin S:

“German fundamentals are good. A gigantic trade surplus (larger than China’s), same for capital account.”

Germany indeed has a large “trade surplus”, more precisely: a large current account surplus. However, that logically implies an equally large capital account deficit. Keep in mind:

current account + capital account = 0.

Some countries have a current account surplus and (hence) a capital account deficit, like Germany. Other countries have a current account deficit and (hence) a capital account surplus, like the US. I wouldn’t consider the US scenario necessarily worse than the German one. There are 700 billion dollars of foreign capital inflow into the US every year, providing additional investment funds and keeping interest rates down, while Germany has a huge capital outflow every year, as an inevitable corrolary of their large current account surplus.

10 Martin S September 27, 2008 at 12:01 pm

@Economist.
Obviously. I meant only to refer to the current situation and who would have an easier time dealing with a crisis of foreign and domestic confidence.

11 age of conan gold December 31, 2008 at 12:32 am

Please come to aoc money, we will give you a great surprise.

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