Saturday, March 21, 2009

The European shadow banking system

This pretty much sums up my own thoughts on the European banking system as a whole, not just the shadow one. There's been so much said about how it's all Anglo Saxon economies that are at fault, with their deregulation allowing excessive leverage and so on. But the truth is that the European banks were even more leveraged up than the US or UK banks. 40 times for some of them, way above that Anglo 30 times on average.

The shadow banking system in Europe isn't so much dead as being kept on life support by banks and central banks in what amounts to a desperate but risky attempt to avoid the reckoning.

You might be forgiven for thinking that the biggest single month ever for securitization in Europe and Britain was sometime before we all realized that we were in a credit bubble, sometime like the sunny days of 2006.

In fact, the biggest month ever, by some margin, was December 2008, when more than 212 billion euros of securitizations were issued in Europe.

One small problem however is that there was almost no demand for them, with only about 8 billion euros in public deals intended to be bought by actual investors wanting to take on actual risk.

The rest were "retained" deals, almost always structured so they were eligible for financing by central banks under repo arrangements.

If the problem at root was excessive leverage (which I think it was) then the solution has to include deleveraging. We'd like this to happen slowly, for sure, but it does have to happen.

But if all that's happening is that the sources of the leverage are changing to central banks, then the European banking system isn't deleveraging and thus the root problem isn't being solved.

That doesn't bode well.

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