BALANCE SHEET EXERCISE

AM | @MackinlayEuruni


QUESTION. READ FIRST AND ‘LOCATE’ PROBLEMS IN THE BALANCE SHEET: DOES IT AFFECT ASSETS? DOES IT AFFECT LIABILTIES? DOES IT AFFECT BOTH?. AS YOU PROVIDE ANSWERS, WE PLOT THE POINTS INTO THE BALANCE SHEET.

(1) “Many banks are struggling to fund themselves as Europe’s debt crisis deepens” (David Oakley: “CDS highlights funding worries”, Financial Times, October 5 2011).

(2) “Austrian banking supervisors have instructed the country’s banks to limit future lending in their eastern European subsidiaries … The government is concerned about losses in eastern Europe –where they are the biggest lenders- and their exposure to Italy … Erste Bank, Raiffesen Bank and Bank Austria have a CEE exposure that exceeds Austria’s GDP”. (Eric Frey: “Austrian banks ordered to limit central and east Europe exposure”, Financial Times, November 22 2011).

(3) “Many European banks have been shut out of traditional funding markets in recent months, forcing them to rely on central banks for liquidity or to become more creative in obtaining new financing amid market turmoil. Accordingly, some of the strongest UK banks are providing strained European lenders shut out of global funding markets with large amounts of financing. The deals average €200-€500m in size, with maturity dates of two to 10 years. However, amounts of up to €1bn have also been heard. ‘Haircuts’, or collateral taken to protect the lender from adverse movements, were very high, at 15 to 25 per cent or more”. (“Tracy Alloway: “Europe’s banks strike funding deals”, Financial Times, November 24 2011).

(4) “Some banks in countries such as Spain and Italy are finding it harder to secure euro funding from conventional sources amid concerns about a possible Greek sovereign debt default, and in the face of deep skepticism from foreign banks. One measure of the pressure on Spanish banks in particular was their net borrowing from the European Central Bank, which increased sharply to average €6992bn in August, from €52.05 in August, according to figures from the Bank of Spain” (Victor Mallet: “Small banks remain in need of funding”, Financial Times, October 5 2011).

(5) “The onslaught on European banks is unremitting. In the latest setback for banks in Europe, Moody’s Investors Service has put the subordinated debt of nearly 90 per cent of them under review for a possible downgrade. No surprises here: European sovereigns have limited appetite or ability to support them, let alone bondholders. But the warning highlights the risk of a European credit crunch as banks shrink assets and as they struggle to fund those assets”. FROM THE CHART: Italy’s Unicredit pays a 700 basis point spread in the interbank market; Santander is at 480 bps, while Barclays stands at 201 bps. (Lex: “Euro bunch of losers”, Financial Times, December 1 2011).

(6) “Mario Draghi, ECB president, told the European Parliament last week: We have observed serious credit crunch tightening which, combined with a weakening in the business cycle, does not bode at all well for months to come. Small and medium-sized companies are being the hardest hit. The most important thing for the ECB is to repair the credit channel” (Ralph Atkins: “ECB sets sights on shoring up banks”, Financial Times, December 5 2011).
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