And You Thought Europe’s Banks Were In Trouble

22 Aug

You may or may not be aware that a big reason behind the current market turmoil, is Europe’s banks. French and Italian banks in particular have been the focus of attention in the past fortnight.

But the problems with banks are not confined to Europe. Consider what one of the best financial blogs in the world had to say recently about the banks of a nation whose economy is disturbingly similar to ours (from Zero Hedge):

Is the next domino to fall … Canada?

While two short months ago, “nobody” had any idea that Italy’s banks were on the verge of insolvency, despite that the information was staring them in the face (or was being explicitly cautioned at by Zero Hedge days before Italian CDS blew out and Intesa became the whipping boy of the evil shorts), by now this is common knowledge and is the direct reason for why the FTSE MIB has two choices on a daily basis: break… or halt constituent stocks indefinitely. That this weakness is now spreading to France and other European countries is also all too clear. After all, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are precisely there (1.41% and 1.92% respectively), and both happen to have total “assets” which amount to roughly the size of their host country GDPs, ergo why Europe can not allow its insolvent banks to face reality or the world would end (at least in the immortal stuttered words of one Hank Paulson). So yes, we know that both French and soon German CDS will be far, far wider as the idiotic market finally grasps what we have been saying for two years: that you can’t have your cake and eat it, or said otherwise, that when you onboard corporate risk to the sovereign, someone has to pay the piper. Yet there is one place where that has not happened so far; there is one place that has been very much insulated from the whipping of the market, and one place where banks are potentially in just as bad a shape as anywhere else in Europe. That place is…. Canada.

As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider.

How do Australia’s banks rate on the Tangible Common Equity (TCE) scale?


But not that much better.

Take note, dear reader. Here we are about to see a classic example of how our Treasurer wilfully cherry-picks from International Monetary Fund reports.

Here’s what The Goose recently had to say about the IMF’s latest report:

The IMF has just completed a regular review of Australia’s finances.

The Treasurer, Wayne Swan, reported the results.

He said the IMF had noted “our resilient financial system.”

“Australia’s banks are well capitalised, prudently managed, and among the highest-rated in the world,” Mr Swan said.

“The IMF notes that banks have improved their capital positions and reduced their reliance on short-term foreign funding, and that they are well placed to ride out any future financial turbulence in offshore markets,” he added.

Wayne has, as usual, gilded the lily, and put words in the mouth of the “authorities” he quotes.

And, he just “happened” to conveniently forget what else the IMF wrote (emphasis added):

17. Bank profits have recovered and the return on equity for the major banks is now around pre-crisis levels. Capital adequacy has improved, driven both by increases in capital and declines in risk-weighted assets. Common equity as a share of tangible assets has also risen to nearly 5 percent for the four large banks


A TCE of “nearly 5%” is not exactly streets ahead of the Canadian banks. Moreover, “nearly 5%” is actually worse than the 5.42% TCE of Italian bank Intesa Sanpaolo (see ZH chart above), whose shares have been under attack and subject to multiple trading halts in the last fortnight to save it from collapse.

18. Challenges remain, however. Banks may be tempted to take on riskier strategies in an environment of structurally lower credit growth. Household debt remains high (150 percent of disposable income) and a rise in mortgage rates could lead to an increase in bad loans, although current arrears are modest. While we recognize improvements in the composition of banks’ funding structure, their sizable short-term external borrowing still remains a risk. In addition, concentration in the banking sector has increased in the wake of the crisis with the assets of the four large banks now comprising about 75 percent of total bank assets…


We have already seen recently, that “riskier trading strategies” is exactly what our banks have been engaged in ( “Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye” ).

21. While banks have reduced their reliance on short-term external borrowing, disruptions in global capital markets could still put pressure on their funding. Therefore, banks should be encouraged to further reduce their short-term borrowing.


This reliance on short-term funding is a key reason why Moodys ratings agency downgraded our banks’ credit ratings in May, and warned the govrnment that it must maintain the government guarantee else they will be downgraded further.

And, it is why Fitch Ratings considers Australia’s banks “most exposed” to the European debt crisis.

Funny … I don’t recall hearing Wayne mention any of that.

Do you?

5 Responses to “And You Thought Europe’s Banks Were In Trouble”

  1. Andrew Richards August 22, 2011 at 12:35 am #

    Let’s cut the partisan crap here though with a bit of a history lesson. All our economic problems began with Howard and Fraser with the commissioning of the Campbell Report which the Coalition rejected on the grounds of how radical it was. Then Hawke and Keating got in and drafted, then implemented, the Martin Report, which was designed to endorse and allow the implementation of the Campbell report, which has caused our once proud nation to descend into fascism over the past 3 decades through banking deregulation, prvatisation, the obliteration of tariffs and parity pricing (to anyone questioning the appropriateness of bringing up fascism, I would recommend looking up Roosevelt’s definition of it). All of which have only served to benefit the International bankers who are nothing more than the most recent face of the East India Company and their ilk.

    Howard continued those policies as has Rudd. Both sides have claimed that noone saw the GFC coming (which is a lie as physical economists had been saying it was inevitable for the past 2 decades – incidentally, it never ended and merely continues to get worse) while both sides of politics continue to support policies which suck the country dry, raise the cost of living through the roof and allow the rich to get richer and the poor to get poorer.

    In fact, let’s be honest, while the ALP are pushing the carbon tax, it was Malcolm Turnbull’s own Goldman Sachs who did the modelling for an ETS.

    So let’s do something unusual in politics and just the partisan spin. The Labor party were infiltrated and corrupted from within by the Fabian Society- the very society which which were the “pioneers” (and I use the term incredibly loosely) of British eugenics (the philosophy which lay at the heart of the Holocaust).

    Meanwhile, the Liberal Party, formerly the UAP were formed because a group of Labor party members felt that the rich should get richer and the poor should starve during the depression (referring of course to Jack Lang and the British bond-holders concerning interest payment for loans Australia had to take out to support the British during WW1). In doing so, they also gave support to the formation of fascist armies in this country by said bondholders, and the notion that the rich and powerful should be allowed to initiate military coups so they can get rich while Aussie battlers starved.

    The question remains of course- will the moderators here have the decency or integrity to approve this post, cause people to think and contribute to bringing about real and profound change whereby people break free of the 2 party-paradigm and recognise it for the divisive imperialist prison that it is, or will it be gagged in the interests of political point scoring and scapegoating? Only time will tell….

  2. Oliver K. Manuel August 22, 2011 at 1:22 am #

    Climategate was the visible tip of a very large, deep iceberg.

    Official responses (“whitewashes”) to the Nov 2009 discovery that temperature data were being manipulated worldwide [1]

    1. “Climategate timeline”:

    Revealed the worldwide extent of corruption in government sources [2]

    2. Deep roots of Climategate”:

    I sincerely hope that the above unpalatable conclusion is wrong, but I know of no other viable explanation for the events.

    With kind regards,
    Oliver K. Manuel
    Former NASA Principal
    Investigator for Apollo

  3. Tomorrows Serf August 22, 2011 at 9:18 am #


    A scathing but probably accurate assessment, Andrew.

    I too agree that we are in Deep S..t when it comes to infiltration of both sides of politics.(and economics,science,education,finance, etc….) This is of course NOTHING NEW!! ( Hewson & Garnaut are/were both Trilateral Commission members) Dr.Megan Clark CSIRO was on the board of Rothschilds Australia, hell even Tony Abbotts wife is ex-Rothschilds), Turnbull is obvious as ex-CEO GS Austalia.

    ‘Twoud seem that the banksters are extraordinarily well organised, and have been since time immemorial. Just look at the trouble Ron Paul is having getting any air time in the US Presidential primaries. (see Jon Stewart’s hilarious assessment of the Ron Paul media blackout) The Pop-Media seems to be well and truly “bought and paid for” Same herein the land of OZ.

    Getting back to Wayne and his defense of the banking system in Australia.

    “Australia’s banks are well capitalised, prudently managed, and among the highest-rated in the world,” Mr Swan said.

    Yeah right!!

    As Shakespeare said, “He that prostesteth too much….”


  1. Australian banks vulnerable . . . still : third wave group - August 23, 2011

    […] competency and level of frankness – a problem which doesn’t feel that misplaced to me. You may or may not be aware that a big reason behind the current market turmoil, is Europe’s banks. French and Italian banks in particular have been the focus of attention in the […]

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