Unicredit collapse: The invasion of ‘zombie banks’

5th January 2012

The prospect of the collapse of a major bank in Europe has been troubling markets for some time. A number of banks have been in the frame, including Belgium's Dexia, some of the French banks and now – it appears – Italy's Unicredit.

In October, Shaun Richards outlined a 13-step timeline for the collapse of a bank . He appeared on Sky News yesterday suggesting that Unicredit, Italy's had now reached stage 3 of that process – i.e. "The Bank tries to raise more private capital in spite of it having no need for it".

As this piece in the Telegraph outlines Unicredit is now looking for a further €7.5bn to meet the new minimum core capital requirement imposed by the European Banking Authority. Markets will now be looking for stage 4 – reassurances from the Italian Government that all is well, the bank is soundly financed with a well-functioning business model, before moving on to 5, when it admits there may be a problem.  

Unicredit's particular difficulties stem from its holding of domestic government debt and poor lending practices in Eastern Europe. As Richards says, "these are its holdings of Italian government bonds (and indeed other sovereign bonds) where prices have fallen heavily (over the last year or so the benchmark Italian ten-year bond yield has risen from 4% to 6.93%). And also that lending in foreign currencies to individuals and businesses in other nations, particularly in Hungary, was going wrong."

But it is far from the only European bank with problems. Robert Peston of the BBC wrote this week about the phenomenon of ‘zombie banks': "The European Central Bank has just pumped an astonishing amount of new loans into the banking system. And yet there are some banks out there which are still short of cash – and are unable to borrow it from other banks, financial institutions or commercial customers.

"These shunned banks have to resort to paying 1.75% to the European Central Bank for this emergency overnight money. And given the way they are being forced to live hand to mouth in this way, dependent on central bank support, they can be seen as zombie banks."

Peston stops short of naming the banks in question, but Richards suggests that a number of French banks may be in the firing line – Credit Agricole, Societe Generale, BNP Paribas. Other sites have gone further. This Business Insider piece lists 20 banks vulnerable to weakness in the Eurozone periphery according to its own ‘stress test':  "We took a list of the largest European banks by assets and compared their market cap, common equity, and total exposure to PIIGS debt (thank you for the bank statistics, EBA!). Then we calculated exposure to PIIGS debt (sovereign and private) as a percentage of the banks' common equity." It has Dexia and Commerzbank at the top of the list, but RBS and Barclays also make the top 20.

Is there a solution? The long-term refinancing operation (LTRO) was the policymakers' solution, but has been robustly dismissed by many: The Telegraph piece points out that in December the European Central Bank revealed that a total of €489bn was taken up through LTRO, which offered banks running out of eligible collateral the option to borrow three-year money.

This has been seen as a sign of the scheme weakness or even failure: "The LTRO bought the EU private banks some time. It did nothing to solve the EU Sovereign Debt Crisis. After less than one week, the cash held at the ECB surged €133B to a new record €347B. Since the net LTRO was only €210B, it tells you that the EU banks not only have a cash problem, but more specifically, as ECB President Mario Draghi says : "hoarding at the ECB signals that the problem afflicting the Eurozone is not so much about the amount of liquidity but that this liquidity is not circulating around the region's banks".

The ECB and others have defended the scheme. In this piece, a Danske Bank analyst says that higher cash held on deposit at the ECB is not a sign that the scheme has failed. Richards suggests that at a minimum there needs to be an audit of the banks by independent experts to discover where the fault lines are. He believes in a version of the Anthony Robbins quote: "If you do what you've always done, you'll get what you've always gotten." This audit should therefore not be undertaken by the same regulators that have presided over the crisis, but by a separate group: "If you simply repeat the same due diligence process, you will repeat the same mistakes," he adds.

The potential for a Eurozone banking crisis has been widely discussed. The cash call at Unicredit may be the next step in what increasingly looks like a slow-motion car crash.


More on Mindful Money

Is UniCredit on the brink of collapse?

Volatile markets and how they can make you money

Eurozone Crisis: Is Spain in recession?

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