Banking crash hits Europe as ECB loses traction in money markets

September 30, 2008 by · Leave a Comment
Filed under: Economic News 

This is getting more serious by the day.  Looks the like European Central Bank or ECB is really seeing their banking freeze up as well.  In the article they mention the five failed banks that have been rescued because of the massive strain in the system.  Europe will need to de-leverage as well.   UK especially, had a very over heated real estate market that was fueled by securitization of mortgages and hedging strategies against different bonds for default with insurance products such as credit default swaps or CDS.  They mention the inter-bank lending market has collapsed and “The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days.”  At this moment is when people need to not panic and let these bad institutions fail so we can clean the system of all this excess and set the right precedent so future banks will understand what happens when you conduct such reckless lending operations.  I have read basic banking and lending theory and everything that has been pasted down in that area was ignored in all cases in this industry from making subprime loans to not carrying adequate reserves against losses on debt insurance contracts.  We should never forget the basics and fundamentals.

News Article:

The Dutch-Belgian bank Fortis, Britain’s Bradford and Bingley, and Iceland’s Glitnir, were all partially or fully nationalized after failing to roll-over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.

“The European financial sector is on trial: we have to support our banks.” said French President Nicolas Sarkozy. He has reportedly ordered the state investment arm Caisse Des Depots to shore up Dexia, even though the bank is based in Belgium.

Germany’s Hypo Real Estate, a commercial property lender, was rescued with a €35bn lifeline from a consortium of local banks. The lender has $560bn in liabilities, almost as much as Lehman Brothers.

Hypo Real’s share price crashed 74pc, setting off a masse exodus from financial stocks in Frankfurt. Commerzbank fell 23pc and Aareal Bank was off 43pc.

Anglo Irish Bank was down 44pc in Dublin on wholesale funding fears.

Europe’s credit markets have come close to seizing up as three-month Euribor jumped to a record 5.22pc and OIS spreads rocketed to 113 basis points.

“The interbank market has collapsed,” said Hans Redeker, currency chief at BNP Paribas.

“We’re now seeing a domino effect as the credit multiplier goes into reverse and forces banks to cut back lending to clients,” he said.

Mr Redeker said the latest alarming twist is a move by banks to deposit €28bn in funds at the European Central Bank in a panic flight to safety. This has jammed the mechanism used by the authorities to shore up the financial system in a crisis.

“The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days,” he said.

The euro plunged on Monday as the wave of bank failures hit the newswires, dropping 2pc to $1.43 against the dollar. It recovered slightly as the US Federal Reserve flooded the markets with $630bn of dollar funding with fellow central banks in the biggest liquidity blitz in history.

Click Here to Continue Reading

Speak Your Mind

Tell us what you're thinking...
and oh, if you want a pic to show with your comment, go get a gravatar!