The Financial Times reported on April 2 that the Eurozone Banks continue to load up on sovereign debt; generally, the debt of their respective host countries.  A few days later, the Financial Times reported a bevy of talking heads crowing over the end of the EC financial crisis.  And then on April 16, the European Parliament voted to approve a slew of new laws for the EU banking marketplace, including a single resolution mechanism so comprised to be almost useless and a common rulebook for winding down the banks.  Does anyone here or there think any of this really matters?  First, it’s going to take years to generate the rules that this legislation birthed and even after the Euro apparatchiki spend years creating detailed rules, the dynamics of Brussels will ensure there will be so many loopholes it would make a block of Swiss cheese blush.  Moreover, does anyone actually think the various nation states will honor these rules if a champion bank is in trouble?  I, for one, do not. 

So the EU banking crisis is over and with its end will come halcyon days of growth and prosperity for the community?  Cognitive dissonance anyone?  Actions, as the saying goes, speak louder than words.  Here’s an action that belies all the happy talk of repaired balance sheets and the independence of the bank from their respective national governments.  The banks are continuing to gobble up sovereign debt.  Government debt now amounted to almost 6% of the combined balance sheets of Euro banks in February.  That is the highest level ever.  And so what are they not doing?  Making loans to business.  That’s not the behavior of a healthy banking system.  It is not good news.

Through that noxious witch’s brew of nationalism and protectionism lurking deep in the bowels of the Basel process, all this sovereign debt is risk free.  Who would have known?  Silly me to think that sovereigns can default or sovereign borrowing rates could explode, eviscerating the value of these bonds.  The banks are required to hold no capital against these exposures.  The panjandrums of Brussels cannot even gin up an argument about unintended consequences to excuse this.  These are intended consequences.  This makes it certain that every bank in the Eurozone will continue, ad nauseam, to buy sovereign debt by the bucket load.  Why?  First, why invest in pesky private enterprises, such as commercial real estate which is perceived to be “risky” and requires the bank to hold capital when the sovereign carry trade, guaranteed to work by the ECB is running like the bulls at Pamplona?  Oh yes, it also helps keep European finances artificially afloat and allows the Pols to avoid hard choices about fiscal policy.  Seems a lot like mutual back scratching, doesn’t it?  So the borrowing and spending parties go on!  (No more exclamation marks.  I’m calming down, somewhat depressed by the wrongness of it all, but calm.)

But this blog is not really about the systemic risk this represents (which is a lot like ignoring the elephant in the broom closet) but about opportunities in the EU for non-EU depository lenders.  This is more confirmation – if such were needed – that the EU banking system is not going to be free to do its job and it’s not going to be there for the real economy.  Not to overstate the case, but this pas de deux by the banks and their enabling politicians help insure that there is a terrific business at hand for the shadow banking market and non-European banks to bank Europe for years to come.  Indeed, this was a leading story in the Wall Street Journal on April 7th under the title US Firms Fill Europe’s Lending Gap.  And then President Draghi of the ECB gave a shout out to securitization saying hey, this securitization stuff really isn’t that evil.  A tell, if there ever was one, that the ECB knows shadow banking is needed for Europe to recover.

It’s hardly a secret, but it’s worth repeating; this is an enormous opportunity.

Look, we’ve talked about this before and in some ways this isn’t news, but with a constant chatter about European banks meeting their stress tests, boasting about their capital ratios and all the related happy talk about the end of the European banking crisis, it’s worth noting when a bubble of additional inconvenient facts rises to the surface of the European financial swamp and bursts for all to see.  It reminds us that not all is well in Europe.

The European economy is not exactly rip-roaring, but it’s going to need capital.  Commercial real estate especially thrives on leverage.  The local regulated banking community simply will not have the dry powder to meet the need.

This is low-hanging fruit, people.  While not underestimating the European capacity to frustrate the willingness of non-conventional lenders to ride to the rescue and lend because to let the heathen capitalist through the gates honors some misplaced notion of social justice; but for the moment, the window is open.  Let’s go pick some fruit.