Only two things keep these banks alive: “a State willing to support them and a regulator that does not declare them insolvent.”

By Don Quijones, Spain & Mexico, editor at WOLF STREET .

Dozens of Greek, Italian, Spanish and even German lenders have volumes of troubled assets higher or similar to that of Spain’s fallen lender Banco Popular. They, too, are at risk of insolvency. This stark observation came from Bridget Gandy, director of financial institutions for Fitch Ratings, who spoke at a conference in London on Thursday.

The troubled banks include:

Greece’s HB, Piraeus, NBG, Eurobank and Alpha;

HB, Piraeus, NBG, Eurobank and Alpha; Italy’s Monte dei Pachi di Siena (which is in the process of being rescued with state funds), Carige (9th largest bank, now under ECB orders to raise capital or else), CreVal, and the two collapsed banks, Veneto and Vicenza (whose senior bondholders were bailed out last weekend);

Monte dei Pachi di Siena (which is in the process of being rescued with state funds), Carige (9th largest bank, now under ECB orders to raise capital or else), CreVal, and the two collapsed banks, Veneto and Vicenza (whose senior bondholders were bailed out last weekend); Germany’s Bremer Landesbank (which just cancel interest payments on its CoCo bonds) and shipping lender HSH Nordbank.

Bremer Landesbank (which just cancel interest payments on its CoCo bonds) and shipping lender HSH Nordbank. Spain’s Liberbank and majority state-owned BMN and Bankia, which are completing a merger after private-sector institutions refused to buy BMN. Now, the problems on BMN’s balance sheet belong to Bankia, which already has its own set of issues, Gandy said.

That many of Europe’s banks are teetering on the brink of insolvency is not exactly new news. Most of the problems that caused the financial crisis have not been resolved. As the financial journalist and former investment banker Nomi Prins said in a 2015 interview with Dutch media group VPRO, “in Europe there still exist massive amounts of trades (on banks’ balance sheets) that are underwater and going wrong every day.”

According to a chart presented by Gandy, most of the banks she cited (in particular the Greek and Italian ones) have total unprovisioned non-performing assets that clearly exceed their total level of capital. In other words, if the losses on those assets crystallized, the banks would run out of funds.

Banks tend to fail when the Texas ratio, a measure of bad loans as a proportion of capital reserves, surpasses 100%, meaning that they don’t have enough capital to cover all the bad stuff on their books. As we reported a few months ago, 114 out of the approximately 500 banks in Italy have Texas ratios of over 100%. Of those, 24 have ratios of over 200%. Since then, one of them (Monte dei Pacshi) has been rescued with public funds while another two (Veneto Banca and Banca Popolare di Vicenza) have been liquidated, also with public funds. Three down, 111 (or 21) to go.

The remaining banks remain walking zombies. According to Gandy, there are only two things keeping banks like them walking: “a State willing to support them and a regulator that does not declare them insolvent.”

In her talk Gandy compared the situation of Popular prior to its resolution with that of Italy’s Monte dei Paschi (MPS), which is still standing thanks to the explicit support of the Italian government. Both entities had a similar volume of total assets, she said. In fact, if anything, Popular had a better problem loan ratio on its balance sheet than MPS. While the Spanish entity was “resolved” through the cancellation and redemption of its convertible and subordinated shares and bonds, MPS was recapitalized with government money.

In the case of Veneto Banca and Banca Popolare di Vicenza, vast sums of scarce public funds were mobilized to make senior bondholders whole though other investors were not so lucky. To make this deal more palatable to the taxpayer, the Italian government now says that it could actually recuperate all of the money with which it bailed out the bondholders once the toxic assets are sold and all the dust settles, and that in fact, the public coffers could end up gaining €700 million in the end.

Of course, similar rosy predictions were made by the Spanish government when it bailed out Spain’s banking system in 2011-12. Last week Spain’s Bank of Spain finally admitted that €60 billion of the funds would never be seen again. Meanwhile, Spain’s bad bank, Sareb, continues to register losses despite the fact it is able to readjust the accounting models its uses pretty much at whim.

As for investors, the message is surprisingly clear in the face of such legal ambiguity: If you hold shares or subordinated bonds in a struggling European bank, of which there are plenty to choose from, there’s absolutely no telling what could happen to them. The value of your holdings depends entirely on the whim of the ECB’s Single Resolution Board, whose decision making appears to be heavily influenced by a whole host of considerations, including potential political ramifications as well as the fear that making investors take big losses in one insolvent bank could end up toppling the entire rickety edifice. But for now, investors in senior debt of banks can sleep well, knowing that next time, taxpayers will be once again shanghaied into bailing them out. By Don Quijones.

What would a disorderly bank collapse in Spain and Italy have done? Read… Autopsy of Banco Popular Shows Fragility of EU Banking System

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