Every Major Bank In The US, Japan, Germany, And Spain Is Undercapitalized

[AllentownJake]

S&P is out with a new look at the health of the banking system that gets beyond traditional metrics of capitalization and leverage.

The Telegraph's Ambrose Evans-Pritchard reports:

Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P's list of 45 global lenders fails the 8pc safety level under the agency's risk-adjusted capital (RAC) ratio. Most fall woefully short.

The most vulnerable are Mizuho Financial (2.0), Citigroup (2.1), UBS (2.2), Sumitomo Mitsui (3.5), Mitsubishi (4.9), Allied Irish (5.0), DZ Deutsche Zentral (5.3), Danske Bank (5.4), BBVA (5.4), Bank of Ireland (6.2), Bank of America (5.8), Deutsche Bank (6.1), Caja de Ahorros Barcelona (6.2), and UniCredit (6.3).

While some banks may look healthy under normal Tier 1 and leverage targets, critics claim these measures can be highly misleading since they fail to discriminate between high-risk and low-risk uses of leverage. The system failed to pick up the danger signals before the financial crisis. The supposedly moderate leverage of US banks in 2007 proved to be a spectacularly useless indicator.

http://www.businessinsider.com/every-major-bank-in-the-us-japan-german-and-spain-is-undercapitalized-2009-11

Probably why the banks aren't lending.

[Turbineguy]

1. It's the nature of safety systems and people.

If time passes and there is no failure, there is motivation to lower the threshold. In the case of a bridge, lowering the factor of safety does not cause the traffic load to increase. In the case of banks, lowering that threshold means you have more money to risk.

I don't think the 1999-2000 rule changes set out to collapse the monetary system. Let's hope this is an interim snapshot of an improving condition.

[AllentownJake]

3. Yes mankinds desire to tinker with things that are working is always amazing

The laws were changed to increase the bottom line....the justification was that human nature had somehow changed since the 1920s.

Both were bad reasons and demonstrated the ability of very smart people to be willfully ignorant of the consequences of their actions when dollar signs are involved.

[KharmaTrain]

2. Many Are "Recharging"

That was a term used by a banker acquaintance I know. Many banks still have lots of outstanding loans or ones that have gone into default...and the gambling casino where bad debts could be sent has been closed. Thus over the past year the run-up in stocks, the drop of the dollar which has helped portfolios with precious metals and foreign currencies to take off and other "recovery" is refilling the coffers of "existing business or accounts" who serve the bank's longterm interests. If those accounts fail and people start pulling their assets out of the banks (a modern day run) it would completely disable the economy and we'd see banks failing right and left. It's hedging right now to try to offset all the bad debt many have on the books and in anticipation the bad debts will increase rather than decrease. Yep, credit remains tight as a drum.

Bottom line is few, if any banks are really prepared to pay off all their creditors and account holders at once if a "call" goes out. This is especially the case in this day of intermingled finances where the failure of an AIG or Bears-Stearns rippled all across the banking world. As long as they hold lots of debt, there will be the inclination to hold onto as many liquid assets as possible and not to extend into more liability.

There's going to be the need for a second stimulus to small business and individuals to bypass this squeeze until the banks can figure out what to do with their bad debt.

[AllentownJake]

4. They aren't recharging well

T-bills auctioned at a negative yield for the first time since December 2008 last year. Easy translation, big investors felt more comfortable taking an insurance policy on their money than by taking interest from a bank to hold it.

Lots of money sitting on the sidelines that was pulled out during the crisis and the people and entities that pulled it out, aren't anxious to throw it back in till they feel secure, they aren't going to feel secure till the banks are recapitalized.

Not nationalizing in April, wiping out the bad debt, and spinning of new entities is looking more and more like a long term strategic era over short term political goals.

Minus increased government guarantees on assets, I see no way the banks recharge.

[KharmaTrain]

5. Their Term Not Mine...

I firmly agree...the money is sitting on the sidelines right now...not about to take risk. It's even more acute as these people did take big risks in the past but didn't know it. As I say, the casino has closed and people are realizing there's no thing as "easy money" and double digit returns. Some have gone very conservative..into annuities and any "secured" investment they can...thus we're seeing hording rather than investing. Also the low prime makes investing in banks as a poor investment. Why put money into them when you can get a better return in other markets right now. Again...it's hording, thus the "recharging".

As an investor, I see things very stagnant...there's no real growth going on or movement in getting the "base" economy going again. It's still downsizing and losses...rescheduling debt or avoiding bankruptcy. We haven't turned the corner...in many ways this economy has yet to hit bottom. There's just too much outstanding debt and no plan to address this problem. The priorities are still "bass ackwards"...you can't base an economy on the massive consumerism this country has enjoyed when those consumers don't have jobs or financial security. I see corporates trying to paper over their excesses and still trying either to put off paying their debts or avoiding them altogether.

I'm still not sure nationalizing would have rectified the debt bombs that are still exploding. The horse was way out of the barn...thus short term seemed to be the only vision; especially when confronted with cratering markets. The fact the market will finish the year over 10,000 is a little consolation as things could have been a lot worse, yet it doesn't really show any long term recovery, just a quick fix...that, as you say, was the politically expidient way to go. The long-term fix is far more complicated and not sure the pain is being felt enough, yet.

[AllentownJake]

6. Agreed

I think next year is going to be a bad year for the market, we'll be able to tell after Christmas sales information is released.

I also wouldn't be surprised if you don't see a few big retailers close in January. I also expect some of the big boys like Home Depot, Target, Lowes, Dicks, Macys, Penny's etc to close a few stores in the first quarter of 2010.

There is going to be a lot of restructuring going on in the retail sector.

[KharmaTrain]

7. I'm Watching It Already...

My thing is the communications world...and I'm already hearing of "structured bankruptcies" that will be happening in January. The "anal-ists" are calling it a soft landing...but it's just another attempt to keep the old shell game going as far as it will go before many of these corporations collapse under their own largess.

You are spot on about fourth quarter and I can't see how it will be the savior some corporates hope it will be. The effects of rising prices and constricted credit on the very consumers they need to spend says its not gonna happen. Those stuck in the revolving credit crunch (I'd call it rape) are really getting pinched...dug deeper into economic servitdue to a point they can never dig out, yet the "rules" are to let the debt pile on as if having a lot of it on the books means going to the government for more of a bail-out.

All the fixes I'm seeing are short-term...be it cash for clunkers or new home buyers deduction. They create artificial upticks...yet the real systemic failures still are at play.

Restructuring is a good thing, but there also needs to be a stimulus for those to pick up the pieces that a disintigrating corporate is sure to leave behind. The big money is in "vulture capitalism" right now...why stock prices go up when a company scales down. There needs to be incentives and low-cost loans to start rebuilding the infrastructure. Maybe I'm a dreamer, but I see this happening next year.