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ZIRP, NIRP, QE, Bank Collapse and Helicopters Coming Too Late – The Lehman Effect Hits Europe – Hard!

It’s official, I’m calling a banking crisis in Europe. Things didn’t go well the last time I did this. Of course, many will say, “But the rating agencies have learned their collective lessons. They would most assuredely warn us if the European banks are close to going bust, right?!!!”. Yeah, right! Reference our past research note on so-called trusted parties in private blockchains for banks. Those interested in purchasing the 22 page report on what is likely the first major bank to fall victim to the coming Pan-European Banking Crisis can do so here. All others, feel free to read on…

Here are some key points:

  1.  The distress in Europe is being caused by large as well as small banks. Slowdown in global growth, negative interest rates being pursued by central banks that will impact bank’s profits, and deteriorating asset quality are the main reasons.
  2.  Some of the big European banks have fared very badly in recent performance. Credit Suisse, for instance, announced a fourth quarter (2015) loss of $5.8 billion
  3.  Recent failure of two major Russian banks has worsened the outlook
  4.  Banks with large RE exposure and large NPLs are considered to more susceptible than the others
  5.  The presence of too many banks in trouble in Europe is aggravating the problem beyond the control of ECB
  6.  Banking sector is in trouble as global slowdown has affected quality of assets, margins for banks and business growth prospects in quite the negative direction. The global economy, with the EU and China/Japan in particular, is slowing signficantly – and this after years of ZIRP, NIRP, QE and other highly creative bailout measures. Next up, pure helicopter cash and further ineffective acts of desperation to be ignored by the media and investing populace.

The “2015 EU-wide transparency exercise”- a report on 105 banks across 21 countries in the European Union published by The European Banking Authority (EBA) raises concern on the bad debt held by banks. The report mentioned European banks have a mountain of bad debts totaling around €1tn. The bad debt amount to 5.6% of total loans and advances of Europe’s Banks and 10% when lending to other financial institutions are excluded. This stands on a higher side compared to the US banks which have a bad debt ratio of only 1.67% against total loans. What many may miss in these numbers is unlike corporate and retail loans, most lending to other financial institutions is indirectly and in some ways directly backstopped by the ECB through programs such as the LTRO and TLTRO. Any banker who can read this report should not, and likely does not, trust his/her fellow European banker.

Banking is a business that relies heavily on trust, and EU banks don’t trust each other. The system, without the significant and necessarily heavy interference of the ECB is essentially locked up. The EU no longer has a banking ecosystem, but an ECB-led and heavily subsidized financial welfare system. 


 Our previous article on this topic showed similarities between EU banks and Bear Stearns in terms of credit quality and the folly of ignoring notional value exposure in potential violent markets. Here I want to emphasize the similarities between EU banks with high NPL growth and the biggest bank failures in global history (both of which were predicted well ahead of time by Veritaseum Founder, Reggie Middleton, via his forensic research team).

    • By year-end 2007 its balance sheet showed $395 billion in assets supported by $11.1 billion in equity – a leverage ratio of around 36 to 1. Notional contracts amounted to around $13.4 trillion in derivative financial instruments of which around 14% were in listed futures and option contracts.
    • Leverage Concerns One measure of a company’s capital adequacy that investors and regulators look to is the relationship of assets to equity, leverage. Lehman computed and reported this measure by dividing assets by stockholders’ equity. In November 2007, Lehman reported a leverage ratio of 30.7x. (Lehman 2007, 29) This ratio had been 23.9x in 2004 (Ibid.) had remained somewhat constant until 2006 when Lehman adopted a more aggressive growth strategy

The bank that we have detailed in our latest research report sports a very similar forensic leverage ratio…

As excerpted from a Swiss National Bank research report:

High leverage as a main cause of financial fragility… The Swiss economy is far from the epicentre of the current financial crisis. Yet, the two big Swiss banks have been hit particularly hard by recent events. This is to a large extent the consequence of their extraordinarily high leverage. For some years now, we have argued that their high leverage makes them particularly vulnerable to extreme financial shocks. Looking at risk-based capital measures, the two large Swiss banks were among the best-capitalised large international banks in the world. Looking at simple leverage, however, these institutions were among the worst-capitalised banks. With the benefit of hindsight, we clearly should have put even greater emphasis on the risks of excessive leverage. Excessive leverage is by no means a problem uniquely associated with the two big Swiss banks. There is increasing international recognition that excessive leverage has been a crucial contributing factor to the current crisis. In April, the Chairman of the Financial Stability Forum (FSF), Governor Mario Draghi, summarised the view of the FSF when he said: “Our conviction is that […] institutions have accumulated a level of leverage that was both misperceived and excessive.” Gerald Corrigan argues that “leverage, in its many forms clearly was a driving force in creating the market conditions that would trigger the crisis, just as the inevitable de-leveraging on the downside of the cycle would severely amplify the magnitude of the crisis.” In a similar vein, the International Monetary Fund (IMF) stresses that the dramatic deleveraging of financial institutions is exacerbating the downward spiral so prevalent in the current crisis. Hence, by implication, the high starting levels of leverage are a major source of the severe and ongoing adjustment problems. Finally, the leaders of the G20 declared only last month that “excessive leverage” was a root cause of “vulnerabilities in the system”. Moreover, the problem of excessive leverage is not limited to the current crisis. It has been a pivotal feature of most previous financial crises. John Galbraith, for instance, has carefully documented the role of debt and leverage in crises going back to the 17th century. More recently, the President’s Working Group on Financial Markets concluded that, “The principal policy issue arising out of the events surrounding the near collapse of Long-Term Capital Management is how to constrain excessive leverage.”

The numbers of our research report’s targeted bank and “trusted party” are as follows:

In closing, excessive leverage brings us right back to 2008 again…

EUR Million
Tier 1 Capital                      5,884
Risk-weighted assets                    44,744
Capital Adequacy Ratio 13.15%
Off balance Sheet Exposure                 117,101
Due from Banks  6,430
Loans to customers 110,671
10% of off balance sheet exposure                    11,710
Ratio 10% of off balance sheet exposure to Tier1 Capital 199.02%
An adverse move of just 10% of off balance sheet exposure can wipe 2x of equity. 4% of total asset move will wipe equity
Leverage Ratio for 2015                    27.51 x
The bank is growing loans, ratio assuredly higher already
For the sake of comparison:
Bear Stearns’ leverage ratio                    36.00 x
Lehman Brothers’ leverate ratio                    30.70 x

Those interested in purchasing the 22 page report on what is likely the first major bank to fall victim to the coming Pan-European Banking Crisis can do so here. These research notes serve two primary purposes: 

  1. To debunk the myth that any bank or financial institution can truly be a “trusted party” in a blockchain solution – private or otherwise.
  2. As a byproduct of 1) above, parties serious about blockchain solutions must serious consider and investigate Veritaseum’s zero trust value trading platform that eliminate the need to trust any party, particularly those “untrustworthy” parties. Feel free to contact me for more information.

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Reggie Middleton
Reggie Middleton is an American entrepreneur who is the founder of Veritaseum [not in citation given] and the finance and technology blog, Boom Bust Blog. Until 2011, he wrote about financial evaluation and the global financial crisis at the Huffington Post. According to Forbes, Middleton "combines self-promotion with meticulous financial analysis that is often delivered with a whiff of bathroom humor".
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