Nomura on European bank deleveraging and US loans | FT Alphaville

Nomura on European bank deleveraging and US loans

Nomura has a new report showing that US loan growth is having a good quarter thus far, even after accounting for the normal seasonal boost, but what caught our eye was the excellent series of charts on the activities of foreign bank subsidiaries in the US.

We already know that a combination of forces (meeting capital ratios, the withdrawal of traditional sources of wholesale funding) has European banks looking to unload, or allow to run off, a sizable amount of their USD-based holdings, and to constrain lending. A previous Nomura note estimated that these banks have about $1.8 trillion in US assets.

The process has begun for some securities, but we haven’t actually observed a lending crunch just yet (click to enlarge all)

But the report also has a useful overview of how these subsidiaries are funded — mostly by bank borrowings and time deposits such as CDs…

So almost entirely wholesale funding, and it’s been fleeing quickly, which anybody following US money market funds has known for some time.

And speaking of those time deposits:

(In this case “deposits” represents wholesale deposits such as CDs, not traditional core deposits.)

To get even more specific and shift to the asset side, Nomura estimates that 48 per cent of all US bank loans held by foreign banks — a category that includes commercial and industrial loans, securities purchases and holdings, and an “other” category that includes loans to other financial institutions — belong to European bank subsidiaries. This amounts to roughly 5 per cent of the total US loan market.

Here’s a summary by bank:

Nomura writes that you can expect the share of commercial loans, and especially the role of these subsidiaries in syndicated lending, to decline and for US banks to try to fill the gap.

We’d also wondered about the extent to which European banks would be dumping their holdings of dollar-denominated asset-backed securities. Turns out these subsidiaries hold about 5 per cent each of total US bank holdings in both agency debt and private-label MBS. But they hold 17 per cent, or about $113bn, of securities in a category that Nomura labels “All other”. We’re not sure what’s in there and Nomura doesn’t say, but it’s reasonable to guess that it includes a lot of CDOs and other Level 3 assets. In other words, a lot of crap with high risk weightings that would be useful to get rid of in pursuit of higher capital ratios.

Perversely, though, the fact that European bank subsidiaries still have unrealised loss on many these securities might lead them to constrain lending or pursue more creative means of deleveraging before selling these off (to avoid booking the loss)…

The report goes on to note a few areas in which US banks would be especially well positioned to capitalise on the departure of its overseas competitors, but such speculation seems a bit strange to us. How much US banks would benefit depends entirely on the context in which such deleveraging takes place. If we’re talking about a mild European recession in which fears of a euro zone implosion have receded, then maybe some US banks will benefit here and there. But at the moment we’re headed for something far worse, and it’s nonsense to think that the effects of contagion would somehow be outweighed by higher market share in a few select areas. So we’re ignoring that bit.

Still, the details of the note are interesting, and you’ll find the whole thing in the usual place.

Related links:
Here comes the (cross-border) deleveraging – FT Alphaville
More lessons from bank recap history – FT Alphaville
Honey, I shrunk emerging Europe – FT Alphaville