Wednesday, 24 August 2011

Foreign Banks in US Prepare for Armageddon

Sit down, I have a data-story to tell. 

You'll not be surprised to learn that it's extremely difficult to extract the sort of timely data about the state of Europe's banking system from the European Central Bank. But across the Atlantic, we have weekly updates about how foreign banks are managing their US operations, courtesy of the Fed.

And the results are a quite startling picture of how banks prepare for the absolute worst: being shut out of interbank markets, and being besieged by panicking depositors. More cautious by far than even in the aftermath of the Lehman collapse, more cautious than seems consistent with commercial banking operations, even. Indeed, the picture is so extreme that you need to know where you can check and follow the data for yourself: it comes from the US Federal Reserve's statistics page (here), Table H8, Pages 18 and 19 – Assets and Liabilities of Foreign-Related Institutions in the US.

The first chart suggests the difficulties foreign banks now have in accessing US money markets, or perhaps just expect to have. Traditionally, foreign banks in the US have raised money in the US, and channelled back to other overseas offices (head office, usually). At the beginning of 2008, this net lending back home was running at US$445b, but in the immediate aftermath of the interbank breakdown of 2008 this net lending dwindled to US$135 billion (Dec 08). The traditional patterns revived, and by the beginning of 2010 the net lending to o'seas office amounted to US$398 billion.

No longer: the pattern of funding has reversed spectacularly. Between the end of 2010 and the middle of August this year, those overseas offices have net repaid US$571 billion to their US operations, and are currently funding them to the tune of US$174 billion. US$200b of that money has arrived since June. It is as if US money markets were no longer open to foreign banks, or at least potentially no longer open to foreign banks, so they have to rely on funding from their head office.

It's even more remarkable when you realize this reversal of funding is taking place against the backdrop of a sharply weakening dollar.

The second chart is even more extreme, and it maps the staggering build-up of cash holdings by foreign banks in the US. Foreign banks' holdings of cash are now equivalent to 103.4% of their entire deposit liabilities. That's right, foreign banks in the US are now in a position to pay out every depositor they have in full, and still have cash left over. Cash holdings now amount to just under half these banks' total assets.

In short, the way foreign banks have restructured their balance sheets in the US suggests one of two possibilities. Either the Fed has demanded it of them, or their head offices want at least to preserve their US operations if Armageddon hits at home.

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