These stats and commentary on U.S. bank exposure to European debt were provided by a friend of mine, Michael Durante, a hedge fund guy who specializes in large U.S. banks. I believe the legal term for their exposure is "de minimus." Mike also believes that large U.S. banks are WAY undervalued by the market, as do I.
"As a reminder, the U.S. mortgage market is roughly $10 trillion.
–U.S. bank exposure to France (anybody in France) is roughly $200 billion or 2% of the U.S. mortgage market and half of that exposure is in overnight, fully collateralized Fed funds market equivalent (overnight LIBOR) and the rest largely is made up of direct, collateralized loans to large French companies. The risk of U.S. bank losses? Minimal, at worst. I'd say $0 to $200 million, but nobody will buy that one.
–U.S. bank exposure to Spain is $40 billion and has a similar make-up as France only it's 0.5% of the U.S. mortgage market.
–U.S. bank exposure to Italy is $28 billion and follows the same trend as above.
–Greece? Too small to measure.
–Portugal? Too small to measure.
–Ireland already bailed out, but less than Spain for a lack of corporate loans to Irish companies = Not many big Irish companies.
And these are gross figures, which means they don't include insurance and other hedges. Almost none of it is sovereign debt. And when is the last time you heard of a bank losing $ in the overnight LIBOR or Fed funds market? A: never! They are fully collateralized by cash securities in repurchase agreements. In addition, most forget that U.S. banks have over $1 trillion in excess reserves on account at the Federal Reserve.
Liquidity is NOT a U.S. bank problem nor is European credit. What's next? Y'all will panic that Greenland may default? Did Latin America bring down the U.S. financial system in the 1990s?
Europe is like Japan. They'll slow boat this issue and remain in a below par economic growth mode for the rest of our lives. The hope of Eastern Europe as a growth zone for the Euro is over. The experiment didn't work."
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Thank you Bob. I feel much better with a professional at the helm.
The does seem to be a disconnect with the data reported elsewhere.
Per WSJ: U.S. Bank Exposure to Europe Could Be $640 Billion, Per Congressional Paper
http://blogs.wsj.com/marketbeat/2011/10/07/us-bank-exposure-to-europe-could-be-640-billion-per-congressional-paper/
Joe
…and I’m not sure what the implications are of the related data below but it doesn’t look good to me. Joe
OCC's Quarterly Report on Bank Trading and Derivatives Activities Second Quarter 2011
Executive Summary
–Insured U.S. commercial banks reported trading revenues of $7.4 billion in the second quarter, 11% higher than $6.6 billion in the second quarter of 2010. Trading revenues in the second quarter of 2011 were 1% lower than in the first quarter of 2011, but were nevertheless the fourth highest on record. –Trading risk exposure, as measured by Value-at-Risk (VaR), increased in the second quarter. Aggregate average VaR at the 5 largest trading companies rose 5.9% from the first quarter to $717 million. VaR in the second quarter 2011 was unchanged from the second quarter of 2010. –Credit exposure from derivatives increased in the second quarter. Net current credit exposure increased 3%, or $11 billion, from the first quarter of 2011, to $364 billion. –The notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 2.2%, from the first quarter of 2011 to $249 trillion. Notional derivatives are 11.6% higher than a year ago. –Derivative contracts remain concentrated in interest rate products, which comprise 82% of total derivative notional amounts. Credit derivatives, which represent 6.1% of total derivatives notionals, rose 2.2% to $15.2 trillion.
http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf
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