US Banks Are Not Alone – Global Insolvency

Posted on October 11th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The New York Times published an interesting chart on how leveraged the global banking system actually is.  In comparison, the US does not look too bad. Then of course, you have to ask yourself ‘are the US banks being totally honest about the value of their assets?’  This chart assumes everyone is being honest, but if they were we would not be in this crisis now, right. Despite that little issue, this is still an interesting chart.

The world’s Banks Could Prove Too Big to Fail – or to Rescue

By Floyd Norris Published: October 10, 2008

The accompanying chart shows the size of national banking systems relative to their countries’ economies, measured in two ways, and also show how well capitalized the banks appear to be, through the latest reported data.

In general, higher figures in any of the graphics indicate increased danger. They do not pretend to show what shape the banks are in, but they do reflect the size of the problem each country would face if its banking system did get into trouble.

The first two charts look not at deposits but at short-term debt carried by the banks. The banks usually have long-term debt as well. But by its nature, that debt cannot be withdrawn if worries about a bank’s solvency suddenly increase. They also have deposits, but deposits are less likely to flee, at least if deposit guarantee systems are trusted. Short-term debt, on the other hand, matures within a year and may not be available to a bank that is in trouble.

The first comparison — the tinted circles — looks at the size of bank short-term debt as a percentage of a country’s gross domestic product. Such figures are not directly comparable, since one is the total amount of income in a country over a year, and the other is the amount owed by banks that may have to be paid over that year. But the comparisons do show relative sizes.

In the United States, the banks have total short-term debt that is equal to 15 percent of G.D.P. But in some countries where banking systems have grown to international proportions, the debt exceeds G.D.P. That is true in Switzerland, Belgium, Iceland and Britain.

The second comparison — the open circles — looks at the short-term bank debt in relation to each country’s national debt.

Again, the relationship is not direct, because a country may have excellent credit that would enable it to borrow much more, but large numbers still raise questions.

“Can they guarantee the deposits if the bank owes 3.5 times the national debt?” asked Bob Prince, the co-chief investment officer of Bridgewater Associates, which provided the data.

For countries in the euro zone, there is an additional consideration. They do not have the right to print money. That may also be true for some other banking systems, if the liabilities are primarily in currencies other than their own. Those countries could face special problems if they needed to come up with huge amounts of cash to rescue banks.

Finally, the leverage ratio gives a rough indication of how risky a nation’s banking system might be. It is the ratio of total bank assets to the net worth of the bank. That could be misleading if the assets are very safe — government bonds, for example, versus subprime mortgage loans — but in general the higher the ratio the smaller the margin of safety.

There again, the United States appears to face a relatively small problem, with an average leverage ratio of 12. The figures range up to 52 in Germany. Theoretically, a 2 percent drop in the value of all German bank assets would wipe out the net worth of the banking system.

These figures will be meaningless if the governments retain the trust of depositors and creditors. “It becomes a matter of psychology,” Mr. Prince said. If governments say the deposits are safe “and the market believes them, then they don’t have to have any money to back up their promises.”

Floyd Norris comments on finance and economics in his blog at

Just a few days back, I published a home made chart with bank asset data from Q2 and how they have the assets categorized.  I don’t remember another post that I have done that has generated so may personal emails, mostly from those in shock. Because that chart goes along the same lines as the New York Times story, I thought it was appropriate to re-post it here.

  • Level I: Mark to Market – readily observable market prices.
  • Level II: Assets that aren’t actively traded, but have quoted market prices for similar instruments – otherwise known as ‘mark to model.’
  • Level III: Assets that have model derived valuations in which one or more significant inputs or significant value drivers are unobservable-otherwise known as ‘mark to myth’ or ‘mark to management’s best guess,’ ‘mark to a hope & a prayer,’ etc…
  • Directly below is the actual post.

    15 Responses to “US Banks Are Not Alone – Global Insolvency”

    1. Nice “chart” in the New York Times. Any idea how these circles would look with hedgefunds and other off-the-book tricks were included?

    2. I mentioned to my wife last night that the general public has no realization of the depth of this problem and that there is not enough current money in the system to guarantee or insure the deposits that are actually in the banks. Hence my question to you in a post a few days ago as to if Wells Fargo is going to make it – I think part of their new strategy is to try and become too large to fai.

    3. Wow, amazing stuff. And so far it’s mostly been subprime that’s been hitting the fan, what happens when Alt A fully hits the fan, prime? Jumbo prime? ouch!! Dow 1,000 anyone??

    4. JJ is onto something…

      Too big to fail is catching like wildfire at the top of Mt. Corp-exec.

      So what might we make of GM’s interest in Chrysler…?

      Wells’ interest in Wachovia?

      Indeed friends, Too Big To Fail (TBF) is the new acronym of the day. You heard it here first!

      Btw, for all you ‘kooks’ out there (I’ll carry the flag for this – proudly), from a few dealers I’ve spoken with in the last couple of days, some gold coins are in the pipeline. Not many, but enough for the savvy to grab a few on the dip.

      Amidst the cornfusion of perceived value and where to park what’s left of your investment, many of the sheep are headed over the cliff of dollar-faith and putting their money in T-bills or other $ denominated assets.

      Don’t make this mistake.

      Have some at home to take care of bills & such. The rest, find some pre ’64 coinage or 1 oz. gold coins. Do what you can while you can do it.

      Continuing down the road of black helicopters…

      Get some storeable food whilst you can. Costco has Mountain House (great brand) in many different varieties. Order a few weeks worth before this sh!t catches on to the ‘American Idol’/World Series crowd. Because when it does finally set into the sloth-brained, ‘average Joe’, it will be too late. Distribution will be saturated/back-ordered and you will be S.O.L.

      Don’t panic. Get prepared.

      Peace –


    5. what do you guys think about LEH CDS recovery 8.625% rate? is it great news for MS and GS?

    6. This morning I opened my companies credit card statement and I’ve been “deleveraged.” 😎

      Each month I charge approximately $2000 and pay off the previous month’s $2000. Underneath this amount sits $10,000 in accumulated debt.

      My minimum payment just jumped from about $150 to $650 per month! This doesn’t effect me because I always pay $2000 but it’s certainly a change in terms. I guess I’m going to take a pay cut and use the extra money to pay off the entire balance in the next 5 or 6 months.

      This experience tells me a lot about whats happening to regular people. Families used to make $5000 per month but spent $6000. This year families will still make $5000 per month but spend only $4000 because (like it or not) they’ll be paying down loans.

      Retail is going to get killed. There is way too much capacity.

    7. Dingo,
      in addition it may totally screw up your credit. By lowering your available credit, your utilization went up. There can be as much as 60 or 70 point difference between a 30% and a 50% utilization, even, if like in this case, your owed amount didn’t change.

    8. CC

      Gold is irrelevant. All the gov’t has to do is confiscate your gold like they did last time.

    9. michaela

      My credit limit on that business Visa is still $15,000. But the hugely increased minimum payment means that Compass Bank suddenly became interested in getting it’s money back… and quick. I don’t totally mind because I knew all along that I should pay it off.

      When this same scenario plays out with working families that are already stretched to the limit it’s going to push many people over the edge. My minimum payment went from $150 to $650 and that’s on just $10,000 in debt. OUCH! My credit score was over 800 the last time I checked. I can only imagine how they’d treat me if it was a couple of hundred points less. Banks want their money back from everyone.

    10. The confiscation of gold. Now that’s a *pleasant* thought…

      However, this time around, the confiscation of gold will have to happen under military force. Of course, the military (foreign or domestic) won’t stop with just gold.. They will confiscate or destroy anything and everything that you value the most, including your life.

    11. That’s funny. My credit limit just increased with Master Card.

    12. Is that because they’re afraid that you’ll take their milkshake? 😉

    13. It’s over and life that was financed as we “knew” it is long gone. It is not a brave new world but a dark, bleak, and pain filled void filled with fat cats running the show. Joe 6 Pack can watch TV all he wants but his ass belongs to the Gov’t. Every generation from here going forward is a lost generation and you heard it here first. Hope things change…but unless Americans revolt….it will be biz as usual. Gov’t gets bigger and citizens get pinched harder.

    14. […] Doing the Nasty on $280 Billion in Alt-A…Largest EverMr Mortgage – September CA Foreclosure ReportUS Banks Are Not Alone – Global InsolvencyAmerica’s Mark-to-Model (Level 2) Banking SystemWachovia’s New Pay Option ARM Plan – ‘The […]

    15. idrnkurmlkshk, try CET, for example. The rule number one – don’t store the gold here so gov can seize it.

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