Some good insights here from John Taylor of the hedge fund FX Concepts. The topic at hand here is the inevitable firesale coming in Europe, as banks are forced to recapitalize without access to fresh money. Basically, to hit capital requirement targets, they will have to shed assets on the cheap, and that will provide some juicy opportunities for the discriminating vultures.
On top of the liquidity problem, the European banks have been told to increase their Tier 1 capital ratios
to 9% by the middle of next year and the Basel III accords imply higher ratios as well. As the average
bank is way under-capitalised according to these new regulations, and the capital market is totally
closed to banks at this time, the only choice that these banks have – if they wish to remain independent
of their governments – is to shrink their asset base. Clearly, the overseas assets are to be jettisoned
first. One, they are not profitable at the higher funding levels, and two, getting rid of them won’t anger
their home governments. However, the amount of assets that must be eliminated could be as high as
€3 trillion, which would mean a sharp cutback in the loans to domestic European borrowers as well. As
this is a significant per cent of loans outstanding in the entire Eurozone, credit conditions are sure to
tighten dramatically even if there is pressure to keep them loose. Considering the horrible toll these
banks are facing for their portfolios of Eurozone sovereign borrowers, it is unlikely that any of them will
be willing to lend outside of their home country. Governments will have to depend on their own banks,
just like the pre-euro days and their costs should climb. The only winners here are the vulture buyers of
the loans, subsidiaries, and other assets that these banks must sell – prices will be way down!
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