EUROPE REDEUX

The Suit gave a speech yesterday in New York that was deemed to be an extension of the hand of friendship to the business community. Get out in front of the financial reforms, said he who had never really earned a bean at a profit making institution in his life was his advice. That of course will not be difficult to do because the latest estimate of the time that it will take to create actual rules and regs that conforms to the rubbish that is the Dodd/Frank bill is somewhat in excess of two years and in the meantime life will go on. By the time the lobbyists get done with it it will be unrecognizable. Oh to be young again and confront the opportunities created by those who know nothing!

Meanwhile, across the pond, our Euro brethren are wrestling with what is taking shape to be known as Basel III. Basel is a rather dull town in Switzerland where the BIS is located and if you really want to make a name for yourself at the next cocktail party pronounce it as do the locals; "BAHL"...and then look down your nose with distain as the member of the poor unwashed asks you, "Where?"

Basel II is what we have all been operating under for the last 20-odd years or so and was suddenly, in 2008, deemed unfit. Enter Basel III or the rules governing the capital requirements and operations of all BIS reporting banks. Trouble is, much like the Dodd/Frank thing nobody knows what the hell this roadmap contains and for that matter whether it is an improvement on the old set of rules or another simple exercise in international bureaucracy. One thing appears to be emerging, however, is that in spite of all the bitching and moaning on the part of the Euros, Basel III--so far--appears to take a much more relaxed stance vis-a-vis the banks than does the legislation in the U.S. For example, the capital adequacy test is clearly less stringent at this stage; whether it remains as such will be something to watch.

Anyway, against this background, two major European banks, Hong Kong Shanghai and BNP reported greatly improved results yesterday in regard to thei profitability and the markets reacted accordingly driving the price of stocks up both in Europe and in the U.S. All is right with the world was the cry. One would hope but one is not sure. Loyal readers of this space will be well-aware that it was predicted months ago that you would have to be a dead banker not to make money in this environment. This has been proven correct in spades for the major players. But while profits are way up, top-line revenue growth is down almost across the board; there has been little or no expansion of banking activity in any form other than to play the interest rate mismatch game.

However, in regard to the two reporting institutions another fact emerged. A great deal of the profit increase came from huge reductions in charges for troubled loans or to be more precise, additions to the loan loss reserve at both institutions which of course is the Joy of Banking: subjectivity--it aint bad 'til I say it's bad.

Now far be it from me to suggest that the management of these two institutions were not careful and conservative in the assessment of their portfolios--the French NEVER fudge things at all--but one must be aware that sovereign risk constitutes a far larger percentage of the risk profile of a Euro bank that in does for an American counterpart and one of the things that Basel III has been careful to do is to preserve the risk rating of Zero, yep, nada,rein,zip to sovereign risk of the Euro zone. Which means, sportsfans that the trillion or so on the books is a free shot insofar as capital requirements are concerned and by definition, risk reserves. By the same token, secondary sovereign risk, states, munis, state-owned institutions are afforded far more generous treatment than would be received here even if our lending profiles were to be the same.
I am not suggesting this is a bad thing but it is certainly an honest--or cynical--approach to who the real risk taker is depending on where one stands in this debate with the Euros making it very clear as (again), has been suggested here that their banks are to be protected. The complete story is yet to be writ but it is fascinating to take watch of the different approaches taken by those who, at the drop of a hat, will mouth such platitudes as "universal accord" and "united in agreement" to protect their own turf. Some of us over here have appeared to have missed that point.