Monday, September 29, 2008

Bank Problems In Europe Too

There has been great interest in my posts about Swedbank ( see here and here) as rumors have been spread that it is facing deep problems. So far these deep problems have yet to show up in Swedbank's financial reports and the chairman of the bank, Carl-Eric Stålberg, has angrily denied and denounced the rumors as lies spread by short sellers wishing to gain from a falling price of Swedbank stocks. However, since it has been the case in other failed banks that the banks themselves have denied problems until they were publicly revealed, it can't be ruled out that the rumors might be true.

There have however been other confirmed cases of banks with serious problems. Last year, Northern Rock started to experience serious difficulties, and today there were three highly publicized cases of financial institutions with problems. U.K. Real estate lender Bradford & Bingley were part nationalized and in part sold off to Spanish bank Banco Santander after it experienced serious liquidity problems. Meanwhile, the governments of Holland, Belgium and Luxembourg bought a stake in Fortis to help it avoid insolvency and German commercial property lender Hypo Real Estate was similarly bailed out by the German government.

Less talked about was how the government of Iceland nationalized the Icelandic bank Glitnir and how the Danish banks Bonusbanken and Ritzau are experiencing serious problems, with Bonusbanken being overtaken by another bank, Vestjysk bank, and Ritzau approaching insolvency.

These are undoubtedly interesting times and there will no doubt be reason to return to this subject in new posts. Because so many European financial institutions have been focused on "spreading the risks" and because this has meant in practice exposing themselves to the U.S. financial system, the U.S. financial crisis is having ripple effects. What this illustrates is that while "spreading the risks" may usually be a good idea, it shouldn't be done without judgment and analysis of the asset acquisition this requires, and that junk securities shouldn't be bought even if it according to mathematical models reduces "formal risk".


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