If My Swiss Bank Ain’t Safe — What Bank Is?

Last month, Moody’s finally released its rating cuts for 15 banks. Four firms were cut by a notch, 10 firms were downgraded two notches and only one firm was cut three notches. These are 15 of the largest banks, the crème de la crème of “too big to fail,” and Moody’s is not so impressed. Of course, nobody was surprised with the results, because Moody’s said back in February that they were looking at the bank behemoths. This gave the banks plenty of time to negotiate the eventual downgrades with their colleagues at the ratings agency.
And remember, if the mortgage securities meltdown episode is any indication, the bloodhounds at Moody’s aren’t quick to pick up the scent of foul financial performance. Who knows how bad things really are?
First and foremost, what Apogee subscribers should remember is that all banks are bankrupt. By their very nature, fractionalized banks could not redeem everyone’s deposits if they all showed up at once to get their money. In fact, the smallest line outside can send shivers up the spine of the bank manager.
No bank is keeping your money in the vault safe and sound. They’ve used your money to lend, invest or, in the case of at least JPMorgan Chase, speculate to earn a return for their shareholders.
In the modern banking era, the loan-to-deposit ratio has crept upward. The lower the percentage, the greater a bank’s liquidity and ability to withstand a bank run. U.S. banks, still licking their wounds from the housing crash, are flush with cash, while average Joe and Jane shun the stock market. The net loan-to-deposit ratio for all U.S. banks is 70%, the lowest it has been since 1984.
Meanwhile in Europe, loan-to-deposit ratios are much higher. Banks such as Danske, SHB, Swedbank, DNB and Nordea have 200% loan-to-deposit ratios, meaning they’ve loaned out twice what they have in deposits. Most other European banks are loaned up more than what they have in deposits.

This means even the tiniest outflow in deposit cash (like what has happened in Greece and Spain) will create liquidity problems. And as the guys at Zero Hedge point out, all the assets that banks were pledging to borrow from the European Central Bank are already encumbered; “There will be no quick LTRO [long-term refinancing operation] collateral-type fix this time.”
There is no question that the bureaucrats at the European Union will do all they can to keep their banks operating. However, the governments are in as bad of shape financially as the banks. It’s been described as two drunks holding each other up trying to walk home from the bar.
Besides being loaded with real estate loans made during the boom, European banks are chock-full of sovereign debt. And according to Josef Ackermann, chief executive of Deutsche Bank, Germany’s biggest bank, a number of European lenders would collapse if they were forced to book their losses on these sovereign bonds.
And if you think the coast is clear for banks, Ackermann doesn’t. “We should resign ourselves to the fact that the ‘new normality’ is characterized by volatility and uncertainty,” he says. “All this reminds one of the autumn of 2008.”
Meanwhile, in the U.S., the banks are showing profits only by taking money out of their loan-loss reserves. Unemployment is still over 8%, 16 million homeowners are underwater on their houses and the banks figure they can rob their loan-loss piggy banks because the great recession is over with.
As for the Fed’s recent stress test, it was a joke. Jonathan Weil reports for Bloomberg that instead of testing whether banks could withstand another 2008 financial crisis without government help, the tests measured the effect on regulatory capital levels:
That’s why the results of the Fed’s “comprehensive capital analysis” are more about public relations and manufacturing confidence than they are about disseminating reliable information on banks’ health. Citigroup Inc. was deemed well capitalized under the government’s methodology when it got bailed out in 2008. So was CIT Group Inc. when it filed for bankruptcy in 2009.
Lending is still flat, and the Fed’s zero interest rate policies have compressed net interest margins. And if that wasn’t bad enough, Dodd-Frank promises to cost banks millions in regulatory expense. The Federal Deposit Insurance Corp. (FDIC) is barely solvent, but the deposit insurer hasn’t had to draw on its standing line of credit at the Treasury just yet.
However, U.S. banks are much more liquid and the government likely more capable (for the moment) of bailing out its systemically critical banks than the banks in Europe. For all the yammering on Capitol Hill and elsewhere, “too big to fail” isn’t going anywhere. Politicians don’t have the stomach for a cluster of “Lehman events.” And the dollar, while not to be mistaken with a Krugerrand, will likely hold together better than the politically constructed euro.
The fact that Ladbrokes betting shop is offering less than even money on the proposition that the euro disappears by 2015 should tell you something. Banks get bailed out; bookies don’t. The smart money is on the euro going away, and soon. So if depositors are covered in a European bank failure, who knows which currency they’ll end up with?
The bottom line: If you need to have money in a bank for convenience, stay within deposit insurance limits, use a bank that the government will bail out and bank in a country where you have a reasonable expectation that the currency will survive for the next few years anyway.