EU Bank Losses

Source: www.theoslotimes.com/

The recent massive losses of some of Europe’s largest banks is alarming, particularly at a time when European Central Bank (ECB) is pulling at maximum on the expansive monetary policy lever in what may be a futile attempt to alleviate yet another looming credit crunch.

Portugal’s largest listed bank, Banco Espírito Santo, is currently tinkering on bankruptcy after reporting a shattering first half loss of 4.8 billion USD, shares in the bank collapsed by 50 percent on Thursday. Banco Espírito Santo’s historic loss has wiped out the bank’s €2.1 billion capital cushion and leaves its solvency ratios well below those demanded by regulators. The Portuguese bank is now scrambling to raise more capital to stem off a potential bankruptcy. Most of Banco Espírito Santo’s 4.8 billion USD losses have been attributed to bad loans made to the Santo family business Empire, which has been collapsing since early July when one of its companies failed to pay a loan. Moreover, three Espírito Santo holding companies have filed for bankruptcy protection, since then. The requirements to build more financial robust contingency measures, to weather future losses, has also been cited by the Bank as contributing to the Banks massive first half losses. The bank said that at least €856 million was needed to cover possible losses on credits granted without proper internal clearance. Indeed, reckless lending has been made by its banking unit in Angola, called Banco Espírito Santo Angola, more commonly known as BESA, when it made loans equivalent to 220 percent of its deposits. The end result being that the Angolan taxpayers had to cough up €4.2 billion in guarantees in December. Banco Espírito Santo has made little reference in its recent earnings report on how it proposes to mop up the mess it created in Angola. However, it did say that it might have to lose majority control of BESA as part of a planned capital increase. Referring to the Angolan situation a spokesman for the bank said that it would, “reach a solution that meets the interests of the Angolan authorities and that which safeguards Banco Espírito Santo’s interest and those of its shareholders.”

Source: www.periodistadigital.com/

The Espírito Santo family has had a strong hold over Portugal’s economy for more than a century. Following
a Portuguese left wing revolution in 1974 supported by the military, resulting in the family’s assets being nationalized, the Espírito Santo family had managed to rebuild their empire. But family fortune has been reversed in recent years with the latest failed commercial activities. Additionally, last week, Ricardo Espírito Santo Silva Salgado, the family patriarch and former head of Banco Espírito Santo, was arrested in connection with money laundering and a tax evasion investigation resulting in the former bank’s boss being ordered to pay €3 million in bail.

Both the Portuguese central bank and Banco Espírito Santo have reassured shareholders and depositors that the required funds can be raised from private investors. Moreover they are reiterating that depositors’ money was guaranteed and that the bank’s distress should not have a negative impact on the broader financial system. Portugal has contingency cash reserves of approximately €15 billion at its disposal, according to the credit rating agency Moody’s, including €6.4 billion of unused money that had been earmarked to rescue its banks as part of an international bailout negotiated in 2011.

But with Banco Espírito Santo’s share so low analysts now believe that the bank might be vulnerable to a hostile takeover bid.

Over the Pyrenees to France, big losses were also reported on Thursday, July 31. The French banking giant, BNP Paribas, posted a net quarterly loss of 4.3 billion Euros ($5.75 billion) for the second quarter of 2014. However, these losses were not related to bad loans. Indeed, the BNP Paribas trading results had recorded an exceptional expenditure of 5.95 billion Euros for the second quarter. This was linked to breaching US economic sanctions, which resulted in record penalties being imposed on BNP Paribas. The US accused the French bank of moving billions of dollars through the American financial system on behalf of Cuba, Iran, Myanmar and Sudan, all under economic sanctions. BNP Paribas had pleaded guilty in June for breaching US sanctions and agreed to pay 6.6 billion Euros as a penalty, if the case didn’t go to court.

However, excluding US penalties imposed on the French bank for breaching the sanctions, BNP Paribas managed to record a quarterly profit of 1.9 billion Euros, which is up 23.3 percent on the same period a year ago. But, the fine has already had a negative impact on the bank’s second quarter results and it will also lower its contingency reserves. The penalties are not only substantial, they are a record amount imposed on any bank, but they also include a one year ban on certain dollar clearing transactions. A spokesman for the bank said BNP Paribas still had enough cash set aside with central banks and capital to absorb any potential future losses. Additionally, Mr. Bonnafé, CEO for BNP Paribas, said the bank had already paid the entire $8.97 billion fine to U.S. authorities, using its large liquidity pool—cash set aside with central banks and assets accepted as collateral by central banks. 

It was also reported that BNP Paribas had acknowledged using regional banks overseas to process more than $20 billion in financial transactions linked to companies and government agencies in Sudan—at a time when the nation was engaged in what the U.S. and others call genocide. 

The French bank has agreed to set up internal supervisors to ensure that the bank complies with international US sanctions.

Regarding the recent Argentinean sovereign default it’s worth noting that Argentina has remained cut off from the global financial markets. So an Argentine debt default may not be so damaging to the global financial markets this time around. Furthermore, the likely amount of debt default of approximately a few USD billion is significantly less than last times non-payment of its 82 USD billion debt. Therefore, Spanish bank exposure is relatively small this time around. Nevertheless, the Spanish banks have their own big problems; a huge mortgage subprime crisis, turning banks into real-estate agents and high loan defaults where one in four of the work force remains jobless.