Many of the bank's assets (loans) are bonds of euro-periphery countries which trade from 30 cents on the dollar in the case of Greece to 80 or 90 cents on the dollar for other countries. But, every one of these bonds are being valued at 100 cents on the dollar on every bank balance sheet, ie., they are not marked to market. Suffice it to say that these sovereign debt holdings have already wiped out the common equity at most banks in Europe and deposits are at risk. See the chart below All European banks are either underwater now, or soon will be, in another panic situation. That would also explain the very low bank stock valuations.
The following chart shows how deficient Euro-bank equity capital remains:
|Eurobank Total Leverage (Common Equity to Assets)|
With Leverage Still High, Please Don't Scare Away Depositors!!
Since deposits are a source of capital funding, the last thing you'd want to do is to cause people to withdraw their deposits when you need more capital! That's a risk created by the European officials in "scaring off" depositors by their recent actions in Cyprus.
|Bank Loan to Deposit Ratios (click to enlarge)|
The chart [above] explains why not only is Europe's several asset constrained, it is also running out of funding, in the form of depositor cash: the most critical bank liability. Remember: without incremental deposits, banks can not invest in new assets, unless they generate cash from operations, and thus grow shareholder equity. There is a problem: as the final chart below shows, Europe, and especially Scandinavia which has consistently remained off the radar, is literally off the charts when it comes to LTD ratios.
With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm.Unless banks lower their leverage, by raising equity capital or deposits, as American banks have done, there are going to continue to be bailouts and financial fragility in Europe. Entire countries are at risk.