French Bank Alert

From Reuters:

Aug 11 (Reuters) - One bank in Asia has cut credit lines to major French lenders while five other banks in Asia are reviewing trades and counterparty risk as worries about the exposure of French banks to peripheral euro zone debt mounts, banking sources told Reuters on Thursday.

Rumors on Wednesday that France was to lose its AAA rating, later denied by ratings agencies, helped trigger the biggest widening in the European credit default swap index since the credit crunch in 2008.

That sudden rise in risk perception, combined with sharp share price falls in French banks, prompted some banks in Asia to speed up reviews of counterparty risk and look at whether they should cut exposure to European lenders, sources at each of the six banks in Asia said.

Contacted about the moves by the banks in Asia, a spokeswoman for top French lender BNP Paribas (BNPP.PA) in Paris said: "We never comment on market rumors."

Societe Generale (SOGN.PA) had no immediate comment to make while a spokeswoman for Credit Agricole (CAGR.PA), which will publish its second-quarter earnings later in August, said the bank would not make any comment.

The banks in Asia and the sources -- a mix of risk officers, senior traders and loan bankers -- could not be identified because of the sensitive nature of the information.

The head of treasury risk management for Asia at one bank in Singapore -- which has a significant presence across the region -- said their credit lines to large French banks had been cut because of the perceived risks in lending to these counterparties.

"We've cut. The limits have been removed from the system. They have to seek approval on a case-by-case basis," the treasury risk official said. The official declined to name the French banks.

Societe Generale put out a statement on Wednesday denying rumors about its financial health after its shares fell by as much as 21 percent.

The statement failed to fend off much of the market's concern with its shares ending the day 15 percent lower, taking losses since early July to more than 50 percent.

A senior credit trader in Singapore said that when a bank's shares fall that sharply their risk officer will automatically look at how much exposure they have to that lender.


At some point we need to look at cutting loses and reducing risk exposure.

European banks are officially under fire, and their shares are plummeting.

The Societe Generale statement of denial is probably backfiring as markets will likely view this as a sign of weakness.

My European bank watchlist now includes: BNP, SocGen, and UniCredit (Italian bank).

Societe Generale is an interesting case that is fairly typical of several European banks; it has extremely high leverage.

A chart and text from Jean-Pierre Chevallier's site follows:

The bank cannot lower the leverage below 50 (even, it was at 60 end 2008!).
To be good leveraged, it should increase the equity until 84 billion of euros!

French state should be recapitalized (nationalized) this Gosbank because it is too big to fail with liabilities at 1.135 trillion of euros for an annual GDP of France nearly at 2.000 trillion: 1,300 € per inhabitant (64 million)!

French (and European) banks have adopted rules of leverage at their convenience, which do not correspond to those internationally adopted. For example, they enter in their accounts, in the equity, quasi-equity which are actually liabilities as these Equity instruments and associated reserves.

As the reader can quickly discern, Soc Gen is in a very vulnerable position should a run on capital begin. A 2% drop in equity would render the bank insolvent. And with liabilities of over 1 Trillion Euros, it is simply too large to bail out.

Because several European banks are in this situation, it is my view that European stock markets are due for a significant correction, once the market realizes the risk. Perhaps at some level the market is beginning to detect these risks, as recently an important development occurred in the charts as shown below:

From Elliott Wave International:

We see in the charts that a support line was broken in June which is now acting as resistance. In my view this is a very bearish development and should be taken as a warning to investors both in Europe and the Americas.

Gold and Inverse ETFs anyone?


  1. Great coverage as always PW, thank you for your continued efforts.

    Good stuff here for sure

    !!RON PAUL 2012!!

  2. Just to put this out there PW optionshouse because of market volatility just increased margins on options to 100%

    something strange going on in this market be careful out there

  3. Thanks for the heads up Bill. Your tip again shows there is too much leverage in the system.

    I also agree there is something very odd going on in this market. My gut feeling (which is often wrong) is that we are on the cusp of a large downward correction, or the beginning of a banking collapse that will start in Europe.

    Also, the Jon Stewart video is outstanding!


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