The Wall Street Journal splash on worries over European banks’ funding received a good deal of play on Thursday morning.
Federal and state regulators, signaling their growing worry that Europe’s debt crisis could spill into the U.S. banking system, are intensifying their scrutiny of the U.S. arms of Europe’s biggest banks, according to people familiar with the matter.
There’s a bit of the “New York Fed does its job” about the story. NY Fed President William Dudley told Bloomberg on Thursday that “This is standard operating procedure,” adding “We’re not focusing on foreign banks any more than US banks,” which is either comforting or worrying depending on your state of mind.
Nevertheless, the article does provide a bit of further evidence for the 2011 deposit crisis by reporting additional NY Fed meetings with European bankers, involving “very concerned” officials.
(Speaking of which, Bloomberg also got an interesting quote on Wednesday evening from Lars Frisell, chief economist at Sweden’s financial regulator: “It won’t take much for the interbank market to collapse. It’s not that serious at the moment but it feels like it could very easily become that way and that everything will freeze.”)
European bank stocks took a hammering on Thursday and as ever there were several plausible reasons: funding, withering global growth forecasts, news of one bank accessing the ECB’s dollar facility, financial transaction tax details, and so on.
For us, though, the most interesting part of the WSJ article is its end, which includes some raw data on European banks’ US assets (H/T Joseph Cotterill):
On June 30, 2010, for example, Société Générale had $55 million in cash reserves in its main New York branch. A year later, that amount had soared to $24.6 billion. At Deutsche Bank, cash reserves at its U.S. arm rose to $66.8 billion from $178 million.
In recent weeks, though, the cash piles at foreign banks’ U.S. arms have diminished. While individual banks haven’t reported data after June 30, foreign banks’ overall U.S. cash reserves fell to $758 billion as of Aug. 3, the latest data available. That is down 16% from three weeks earlier, though it’s still up sharply from the beginning of the year.
There are two stories here, one real (the massive increase in cash assets from 2010 to 2011), one possible (whether regulators are right to be worried about declining dollar cash piles on foreign bank balance sheets). Both are based on Fed H8 data, which show the assets and liabilities of US-based banks.
The first story, in part, reflects the impact of QE2 on foreign banks’ cash positions, and their ability to arbitrage the Fed using the IOER — a point made previously by FT Alphaville’s Tracy Alloway.
The second is less clear cut, although KBW bank analysts were also floating it on Thursday, using a different part of Fed H8 data.
In the Fed’s H8 report there is a line item called Net Due to Related Foreign Offices. Similar to the funding crisis in 2008, this line item has spiked recently implying that more dollars are being sent to the US by foreign entities.
This could be driven by money parked at the Fed simply for rate and safety purposes i.e. the Fed pays 0.25% on excess reserves while fed funds have been hovering around 0.10%. It is possible, in our view, though that some of this is being driven by regulators’ desire to have dollars domiciled in the US.
We’ve taken a look at the relevant H8 data. The WSJ uses non-seasonally adjusted data, which suggests a bigger drop in the cash assets of “foreign-related institutions in the United States” from July 27 to August than if seasonally adjusted data are used. The former shows a decline from $1,012.8bn to $957.2bn; the latter from $838.4bn to $757.7bn. The trend is still there, just not as pronounced — an 11 per cent drop over three weeks rather than a 16 per cent drop. And these piles are pretty big to start with.
The “spike” KBW refers to is a move from essentially zero at the start of the year to $306.7bn as of August 3, seasonally adjusted. The amount has actually declined from $362.4bn in June, which could be a reflection of the cash pile shortage floated by the WSJ. Or it could be to do with QE2 and the arbing, again.
It’ll be interesting to see where the line stands on Friday, when the next batch is released.
Until then, though, it’s hard to conclude anything from the WSJ story or the KBW note. There are some funding stresses in some European banks. We’ve pointed this out before, using data, here and here. We’re also not big fans of how the so-called shadow banking system remains a big systemic risk. Thus to answer our title question: the NY Fed would be derelict in their duty not to investigate. It just needs to know where to look.
For, contrary to what the WSJ and KBW suggest above, the Fed’s H8 data aren’t telling us anything much about today’s funding stresses — at least not yet.