Anyone wondering why the outbreak of fear and loathing in financial markets about Europe won’t go away, the latest quarterly report from the Bank of International Settlements has the explanation.
The report reveals that French and German banks have lent nearly $US 1 trillion to the most troubled European countries (Spain especially).
According to the report, French banks had lent $US493 billion to Spain, Greece, Portugal and Ireland by the end of last year while banks in Germany had lent around $US465 billion.
According to the report, Spain, Ireland, Portugal and Greece owe nearly $US1.6 trillion to banks in the eurozone, either in the form of government debt or loans to companies and individuals in the four countries.
Lending by French and German banks amounted to an estimated 61% of that total.
"As of 31 December 2009, banks headquartered in the euro zone accounted for almost two thirds (62%) of all internationally active banks’ exposures to the residents of the euro area countries facing market pressures (Greece, Ireland, Portugal and Spain).
"Together, they had $US727 billion of exposures to Spain, $402 billion to Ireland, $244 billion to Portugal and $206 billion to Greece," the BIS reported.
The BIS report (BIS is the central bank for the world’s major central banks) helps explain why there is so much nervousness about the health of European banks and why European banks distrust one another.
The latter point is underlined by the fact that Europe’s banks had 360 billion euros on deposit with the European Central Bank a week ago.
They are paid 0.25% interest compared to rates of around 0.32% in the market, which doesn’t seem much, but means they are foregoing around 400 million euros of interest a year.
The French and German banks are far more exposed to the European debt crisis than the banks of any other countries, which helps explain why so many of their peers in Europe and around the world remain concerned about their health.
The banks and their national governments won’t release any fuller figures on exposure, which adds to the high levels of concern and therefore the increased volatility in financial markets every time there’s some bad news or event like a ratings downgrade.
The BIS report does reveal where the gross risks from Spain and other troubled eurozone countries are concentrated, but not which individual banks would be most exposed. The BIS does not identify individual banks, that’s the responsibility of national banking regulators and central banks.
This lack of transparency (especially in Germany) adds to the fear factor among bankers that has lingered since late March when Greece hit the fan.
At the moment we do know that some banks in France and Germany have exposures to countries like Spain, Greece, Italy and Portugal. Deutsche Bank has owned up to the small sum of 500 million euros, but the German government-controlled HRE (Hypo real Estate) has some 80 billion euros in reported exposures.
The BIS figures show that most of the claims held by the French and German banks were from companies, individuals or other banks, and Spain was the biggest debtor country.
But much of the holdings were government debt – $US106 billion for French banks and $US68 billion for German banks.
The exposures raise the question of whether the loan exposures are adequately provided for or covered by existing capital levels, or whether Europe’s hundreds of banks need to raise more money to strengthen balance sheets.
UK banks have lent $US230 billion to Ireland, while Spain – besides being one of the countries with a debt problem – has lent $US110 billion to Portuguese banks and individuals and companies.
The BIS report revealed that US banks have less than $US200 billion in lending to Spain, Greece, Portugal and Ireland.
But they in turn have hundreds of billions of dollars in loans to banks in France, Germany and the UK.
