European Interdependences (1): Banking

I start this new series of posts with banking, because I’ve been wasting some time thinking about it.This post is divided in two parts. In the first part I look at banking claims on specific countries. In the second part I turn the issue upside down and consider the exposure of the big three European countries and in the last part I make some conclusions about the state of affairs in the Eurozone. For now suffice it to say that there are indeed banking interdependences, that countries are heavily exposed to each other, that  Germany, France and the UK have a role of leadership, strong enough to explain their eagerness to “bailout” the Irish banking sector. I should also notice that if Portugal’s banks go bust it is possible that so will Spain’s, although it is not at all certain. A Spanish bust will be damaging to Germany, France and the UK, but directly, not much so. Finally, if Italy or Belgium go bust so does the France, which would derail the whole continent, drag down the USA, and consequently the world. However, Belgium and Italy don’t seem to be that exposed to any particular country. So although banking wise we are interconnected, it is possible to envision we could live with some of us going bust.

If you are interested in finding data from this topic, Datastream is your best bet (as on so many other issues). Obviously you need to have access to it, which means you have to be part of either a Government or Economics Department of some University or work for some organisation that has purchased a license to use it.

Because it is quite an expensive license to get, not that many organizations have it. Therefore you can do what I did, use the Quarterly Reviews of the Bank of International Settlements, specifically table 9.b, which tends to be around page 74 of the detailed statistical annex(Excel file here to save you the trouble of copy pasting from PDF to Word and from Word to Excel).

Anyway, enough of technicalities, on to the actual post. Underneath these lines you will notice 12 pie charts. These describe the division of foreign claims on Portuguese, Irish, Spanish, Italian, Greek, Belgian, French, UK’s and Germany’s banks. I do beg the forgiveness of Eastern Europeans and Scandinavians, but my concern was mostly directed at the PIIGs and their relationship with the big three member states (Germany, France and the UK). The charts describe how much of the total claims each country represents, in absolute terms and as a percentage of total. The absolute values are expressed in US$ and as “times a million”. Therefore when the pie says that France claims 53,469 from Greek Banks, this actually means 53, 469 Billion US$. The data comes from the BIS quarterly review of December 2010, relating to data of the previous period, June 2010.

So what do we make of this?

Well first of all there are indeed interdependences. Even the UK’s banks owe more than half of their foreign debt to European Banks. In their case, it is mostly owed to Germany, Spain, France and Ireland. Moreover we also notice that the big three countries dominate the banking claims of all of the other countries, often adding up to more than 50% of their debts:
France is the largest creditor of Greece, Italy and Belgium, where its claims represent 30%, 37% and 44% of these countries’ dues.
Germany is not the first claimant of the banks of any of the PIIGS. However it is consistently the second claimant throughout.
The UK is the largest claimant only to France and Ireland.

Aside from this I would like to highlight the following two facts:
First, Portugal owed a third of its debt to Spain. Second, the largest claimants of Belgium are France and the Netherlands, which together claim more than 60% of all Belgian banking debt. This is interesting given the ethnic divisions of Belgium between French speakers (Walloons) and Dutch speakers (Flemish). It might also have something to do with Fortis going bust. I don’t know. It is however the only time I have found the Netherlands being claiming more than 10% of anyone throughout the data.

Next I have taken this data and considered exposure, rather than claims. Thus instead of investigating how much is claimed of Spain, I can see how much Spain claims from others, ie: its banking sector’s exposure to other countries’ banking sectors.

The charts above show that:

Europe is the biggest declared (because a lot of countries don’t belong to the BIS) claimant in the international market, with a stake in the American banking industry worth 3 Trillion US$ (a third of which is owned by UK banks).

It is the biggest market for almost all of its own member states and the biggest partner of the USA. However, it seems the UK marginally prefers the USA rather than Europe.

Moreover, Germany, France and the UK have spread out their risk fairly similarly. They have one or three countries where they’ve invested a lot(11%-25%), a couple where they have invested a little bit less (5%-4%) and a lot of small little investments.

Spain is an outlier in the distribution of its exposure, in that it is very concentrated around the UK, at 60%, and then followed from a far by Portugal.

Conclusions relating to the next countries on the rescue agenda (Portugal, Spain, Italy and Belgium):

If we use the UK’s threshold of 13% exposure to Ireland as a rule of thumb about when a country will consider itself to be so exposed that it will find it beneficial to bail out a partner, some conclusions can be drawn from the above charts about hypothetical banking scenarios in Europe.

Commentators seem to be focusing on Portugal, and with good reason when you consider the size of the country’s private debt. If it’s banking sector starts showing signs of failing, Spain, with an exposure of up to 12% may be the first to seek an EU intervention, and would probably find support in France and Germany. If this were unsuccessful and the Portuguese banking sector were left to go bankrupt, in the hope that foreigners could come and buy it cheaply later, the exposure of Spain could damage the country substantially. If it then led to markets shunning Spanish banks, Germany, France and the UK would be the countries with most to lose, although it is unclear that their exposure is collectively large enough to guarantee they would be willing to intervene, as neither has an exposure to these banks superior to 10%.
The banking situation only becomes truly grim when a banking crisis in Belgium and or Italy enter the picture. France in particular is very exposed to both of these countries, with a 33% stake in their survival. Obviously, if France goes belly up, that’s the end game.

Of course this is a rule of thumb. the 13% threshold is a coetris paribus minimum, and it is possible to imagine countries would rescue each other at lower levels of exposure. Coetris paribus, as an assumption is also something of a messy assumption. It presumes everyting else is the same, where as structural contexts no doubt vary. For one I don’t measure the countries foreign exposure as a percentage of the total assets of the country’s banking sector. This exposes my analysis to criticism such as that a 50% exposure might not be so big, if a country’s banking sector is overwhelmingly inward looking. Moreover, this analysis only takes into account the size of banking lending and borrowing. It says nothing about the securities and derivatives market. Finally, a banking bust transmits through to the rest of the economy, where other interdependences could take over and increase the size of the damage.
Although more criticism can be envisioned, these charts provide a rough and incomplete descriptive map of interdependences that is nonetheless informative.

This entry was posted in Banking, European Interdependences and tagged . Bookmark the permalink.

2 Responses to European Interdependences (1): Banking

  1. George H says:

    This is very nice. Excellent work.

    Just curious. Do these include any debt put onto the book of ECB’s European Financial Stability Facility?

    • fmpdea says:

      First of all, let me apologise for taking so long to reply. It was unavoidable.
      Thank you for your kind words. I’m not sure, but I believe that the data used for these graphs only relates to interbanking credit, so no public sector, fiscal or monetary. The best place to get ECB data would be at it’s website. It’s generaly under the heading of “Eurosystem” credit/loans or something to that effect. Unfortunately you can only see it’s aggregate exposure as the ECB does not publish the nationality of its debtors.
      I’ll probably do a piece about this again some time soon. Until then, I hope this helps

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