Thursday, August 18, 2011

Thursday Post #4: Will Canadian Banks be in the market crosshairs soon?

Yesterday news broke that one European bank was in dire need of US dollars and ended up borrowing $500 million from the ECB. The information came via the results of the ECB's tender operation for emergency 7 day liquidity, arguably the closest the ECB has to a dollar denominated discount window.

One bank borrowed $500 million in a 7 day liquidity providing operation at a 1.1% rate.

This was significant because there had been no borrowing under this facility since March 2011, and the last time there was a sizable borrowing under the 7 Day OT was back in May 2010, when Europe was blowing up for the first time and the ECB was scrambling to contain the contagion.

The news of this borrowing sent the stock market plunging 5% today.

Investors freaked as speculation mounted as to which European Bank had to go crawling to the ECB for a sizable dollar-based capital injection (especially since this same bank is certainly using the ECB's various other liquidity providing lines of credit).

All eyes will be on the stock market again tomorow.

That's because it was revealled this afternoon that the Federal Reserve Bank of New York (FRBNY) just reactivated FX swap lines with Europe. 

The FRBNY  announced that in the week ended August 17, it lent out $200 million to not the ECB, not the BOE, but the "most stable" of all banks: the Swiss National Bank.

This is the first use of the Fed's Swap Lines since March, and the most transacted under this "last ditch global bailout swap line" since October 2010.

This event also gives us a hint that the European bank in question in dire need of cash is Swiss, which in turn means that it is not some usual PIIGS suspect, but one of the two "big ones."

If this is true, then the European insolvency and liquidity crisis is about to escalate.

We await the opening of the markets tomorrow with keen interest.

But this story doesn't end there. Let's ponder all this fervor about European Banks and their Tangible Common Equity ratio for a moment.

Is it just European Banks that investors should be worried about? Take a look at this chart (click on image to enlarge) posted on Zero Hedge:

This is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4%.

A whopping 30% of the Banks on this list are those situated in Canada. 

Canadian Imperial Bank of Commerce (5th spot), National Bank (11th), Bank of Nova Scotia (13th), Toronto Dominion Bank (14th), Royal Bank (15th) and Bank of Montreal (21st) are all on the list.

[For those unfamiliar with Canada, that's every large bank in our country]

Canada has been completely spared from the retribution of the bond vigilantes so far but one has to wonder how long before the contagion worries begin to take hold here.

How long before Canadian sovereign CDS, not to mention Canadian bank CDS, start to go quite a bit wider?

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  1. Panic flight to safety

    interesting take on the situation.

    “It won’t take much for the interbank market to collapse,” said Lars Frisell from Sweden’s Riksbank. “It is extremely important that we don’t see a repeat of the situation in 2008.”

  2. In regards to your post today, like Jim Sinclair says it's "Management of Perspective Economics". The American news clip says food prices are up due to weather, while ignoring money printing. Garth Turner says commodities are up due to speculation, again ignoring massive money printing. All the BC media ignore the massive cost to BC Hydro of paying the new Independent Power Producers much more than it costs for BC Hydro to produce power on its own. This will bankrupt Hydro, the rest about employee costs is just noise. Planned prison construction in Canada, when crime is decreasing.
    Everywhere one looks its nothing but baloney by governments and the media.