Alternative title: Moralrisikodämmerung.*
From a Fitch report just out on Wednesday — a twist on the big contagion story of German banking exposure to a Greek default:
Substantial amounts of Greece sovereign exposure lies not with the commercial banks but with KfW (‘AAA’/‘F1+’), in its agency role servicing its owner the German government and run-off institutions backed by loss-absorption mechanisms from the German government. Although Commerzbank AG (CBK; ‘A+’/‘F1+’) is the most exposed commercial bank to overall Greek risk in absolute (euro) terms, as a proportion of regulatory equity, Deutsche Postbank (‘A+’/‘F1+’) is most exposed, followed by CBK, Landesbank Berlin (LBB; ‘AA−’/‘F1+’), DZ Deutsche Zentral Genossenschaftsbank (‘A+’/F1+) and Landesbank Baden-Württemberg (LBBW; ‘A+’/’F1+’). However, even for the more exposed banks a hypothetical 50% haircut of Greek sovereign exposure would not result [in] such a depletion of banks’ capitalisation that a rating action would be automatically triggered…
KfW manages Germany’s bailout loans to Greece, naturally. But there’s another German sovereign agency — the illustriously-titled FMS Wertmanagement Anstalt des öffentlichen Rechts — which currently holds the run-off assets of Hypo Real Estate and DEPFA. Hypo alone dropped off €173bn in nominal assets with FMSW.
In the words of Fitch:
This spin-off included a substantial amount of Greek debt and is partly responsible for the material decline of Greek exposure in the banking system…
We had a taste of this with shifts in Hypo’s covered bond collateral following the bad-banking manoeuvre back in October 2010, which expunged cover pool exposures to the Greek public sector in similar fashion.
Here’s the vanishing exposure in various Fitch charts (Hypo was renamed Deutsche Pfandbriefbank — bit like a ‘names have been changed to protect the innocent’ thing, except no one is innocent):
(Update — Oops! Slight double-counting hiccup with the data here. The Deutsche Bank Group exposure should be read as including Deutsche Postbank’s numbers. Overall exposure should be more like €8.1bn than €9.45bn)
This chart is quite important as it shows how Fitch estimates, produced in May 2011 (after the bad bank shift), vary compared to the standard BIS statistics:
So it’s gone off bank balance sheets (and hence, out of the official banking statistics) and into the German sovereign balance sheet.
There’s our point about moral hazard. Still, however queasy that makes you, the point is also that it’s the government exposed to Greek risk already rather than individual banks.
Which you might conclude is a perversely good outcome for containing the systemic risks presented by Greece.
We’re not exactly that confident, as the tale doesn’t quite end there.
Let’s take Commerzbank, which is as Fitch says the bank facing the biggest outright losses on Greece risk through the portfolio of assets inside Eurohypo (and remember the government owns a quarter of Commerzbank even after its recent cash call). Fitch says the bank could absorb a Greek bond write-down in its recurring earnings. It’s generally a theme across the German banks.
However, it’s still more than capital at threat here.
But we can always think of tail risks, and even beneath that, what the ratings agencies tend to call ‘second-order’ effects on funding markets from a Greek default. Short-term interbank markets falling apart for example. German banks might be OK… but who really knows about French or Belgian exposures. Plus, the risk is of prompt restructuring by Ireland and Portugal in the wake of Greece, to say nothing of a Spain crisis, swamping banks all at once. Another, huge, tail risk is a euro exit. Commerzbank is a pretty big name in trade finance, for one thing. And of course, throughout this lies a very different resolution regime for German banks than before the crisis.
See what we mean? Kompliziert.
*That’s probably a rubbish way to transliterate ‘death of moral hazard.‘ Sorry!
A German bad bank, a collateral switch – FT Alphaville
To avoid Greek restructuring losses – an accounting loophole for banks – FT Alphaville
Contingent liabilities, letter of credit edition – FT Alphaville