Saturday , 23 September 2017


Coming Collapse of the EU Banking System Will Bring About Collapse of Entire Western Financial System!

We are facing a crisis in Europe that is far, far worse than 2008. [It is so bad that,] before it ends, it is quite possible that we will see the entire western financial system collapse and a new system put into place. Words: 912

So says Graham Summers (www.gainspainscapital.com) in edited excerpts from his original article*.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Summers goes on to say, in part:

This will mean:

  1. Many major banks disappearing, as well as numerous, potentially lengthy, bank holidays...
  2. Multiple sovereign defaults, as well as broad economic contractions and their commensurate unemployment/ civil unrest/ erasure of retirement accounts/ pensions...
  3. New currencies or new denominations of currencies possibly being introduced…
  4. Massive wealth destruction to the tune of tens of trillions of dollars…
  5. The breakup of various countries/ unions and the implementation of new political/power structures.
  6. Very serious trade wars…and very possibly a real war.

If the above make you frightened, you’re not alone.

As I’ve dug deeper and deeper into the inner workings of the global financial system over the past months, the information I’ve come across has only gotten worse. I’ve been holding off writing all of this because up until roughly April/May it seemed possible that the world might veer towards another outcome. I no longer view this to be the case. I am almost certain that what I’ve written above will come to pass – so buckle up and let’s dive in.

How the Global Financial System Works

In order to understand why we’re at risk of the financial system collapsing, you first need to understand how the global banking system works. When you or I buy an asset (say a house, or shares in a company, or a Treasury bond), we do so because we’re looking to increase our wealth through either a capital gain or through the income that asset will pay us in exchange for us parking our capital there….

Banks, however, work differently. When a bank buys something, especially a bond, it parks that bond on its balance sheet as an “asset.” It then lends money out against that asset. This, in of itself, is not problematic except for the fact that the financial modeling of 99% of banks assume that sovereign bonds are “risk-free.” Put another way, their models assume that the banks will always get 100 cents on the dollar back.

Yes, you read that correctly, despite the fact that world history is replete with examples of sovereign defaults (in the last 20 years alone we’ve seen more than 15, including countries as significant as Russia, Argentina, and Brazil), most banks assume that the sovereign bonds sitting on their balance sheets are risk free. This phenomenon occurs worldwide, but given that it will be Europe, not the U.S. that takes the system down, I’m going to focus on European bank models/capital ratios.

The European Union (27 Countries) Model

You may or may not be familiar with EU banking law. EU banks are meant to comply with Basel II which is a series of capital requirements and other specifications meant to limit systemic risk.

In terms of capital ratios, Basel II requires that EU banks have equity and Tier 1 capital equal to 6% of risk weighted assets. On paper this idea was supposed to limit bank leverage to 16 to 1 (the bank has €1 in capital or equity for every €16 in loans). However, the term “risk weighted assets” destroys this premise because it means that the bank’s loan portfolio and ultimately its leverage ratio are based on the bank’s in house models/assumptions concerning the risk of its loans.

Let me give you an example. Let’s say XYZ Bank lends out €50 million to a corporation. The bank won’t necessarily claim that all €50 million is “at risk.” Instead, the bank will claim that only a percentage of this €50 million is “at risk” based on the company’s credit rating, financial records (debt to equity, etc), and the like. Thus, based on “in-house” risk modeling, European banks could, in fact, lend out much, much more than the Basel II requirements would imply.

Considering that both bank profits and executive compensation were/are closely tied to more lenient definitions of “risk-weighted,” (i.e. lend as much as you possibly can) it’s safe to assume that EU banks are in fact much, much more leveraged. Indeed, according to the IMF’s “official” analysis, EU banks as a whole are leveraged at 26 to 1. I would argue that in reality many of them are well north of 30 to 1 and possibly even up to 50 or 100 to 1.

The reason I can claim this with relative certainty is because the EU housing bubbles dwarfed that of the U.S.. In the chart below the U.S. housing bubble is the lowest line. After it comes Britain (blue) and Italy (orange) then Ireland (green) and finally Spain (dark blue).

 

You can only get bubbles of this magnitude if you’re lending to literally anyone with a pulse – and you can only lend that much if your in-house risk models believe that the risk of lending to anyone with a pulse is much, much lower than reality.

Given the above, EU banks are likely leveraged at much, much more than 26 to 1. Indeed, considering how leveraged and toxic US banks’ – especially the investment banks’ – balance sheets became from the U.S. housing bubble, the above chart should give everyone pause when they consider the TRUE state of EU bank balance sheets.

This fact in of itself makes the possibility of a systemic collapse of the EU banking system relatively high.

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*http://gainspainscapital.com/?p=1967 (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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