Societe Generale has released ‘hard facts’ about its liquidity position on Monday.
Among the points the bank says it has managed to successfully manage a reduction in access to USD funding through a disposal of USD legacy assets, increased use of secured USD funding (repos), EUR/USD swaps and a “reduction in short-term market positions”.
But as Espirito Santo Investment Bank’s Andrew Lim is quick to point out, the bank never actually states its short-term high quality liquid assets with respect to its short-term wholesale funding reqirements. That is, its coverage ratio.
In other words it’s all very well selling off legacy assets, and depending more on secured USD funding (repos) but that sort of strategy only really works providing you have a large amount of short-term high-quality liquid assets to pawn to begin with.
Just like an individual facing a short-term liquidity crunch, if you happen to own a bunch of valuable gold jewelery, it’s more than likely you’ll be able to raise the short-term cash you need from the pawning industry. If you only own a bunch of already constructed flat-pack furniture, whatever its book value, you’re going to be less likely to raise the cash.
(The point to appreciate here is that it’s only the ECB which lends cash against the equivalent of flat-pack furniture — possibly why the EUR/USD basis swap is one other option being presented by SocGen as a funding route. You switch your flat-pack furniture for euros, and then swap them for dollars in the currency basis swap market.)
Nevertheles it’s for all these reasons that the coverage ratio is so particularly important when assessing SocGen’s interim strength, says Lim.
As he notes (his emphasis):
This is a fairer measure of the robustness of Soc Gen’s liquidity profile and in this respect, Soc Gen fares the worst out of all the French and investment banks (see page 4 of attached note). Soc Gen states that the group’s buffer of unencumbered liquid assets is €105bn - however, this includes lower quality assets (such as risky sovereign bonds which can now only really be repo’d with the ECB, and AAA credit assets like RMBS, which we do not consider high quality and liquid). We think its true high quality liquid asset portfolio is more like €42bn by our calculations.
So you see the point. SocGen says it has €105bn of unencumbered assets for repo use, Espirito Santo says that’s only the figure if your pawnshop happens to be the ECB. To all normal extents and purposes the real figure is acually €42bn. Quite a contrast. (And €105bn figure wasn’t too big to begin with.)
Meanwhile, this is how SocGen stacks up versus its comptitors on short-term liquid assets according to Espirito Santo’s definition of high-quality liquid assets (which excludes Spanish and Italian bonds):
Not good.
All of this gets to heart of the issue. SocGen’s low exposure to risky sovereign bonds, its solid long term funding positions and all the other things mentioned in today’s presentation are irrelevant. It’s the banks short term funding profile that counts.
Or as Lim puts it:
This model will come under threat if the credit and equity markets lose belief in the robustness of its short-term funding profile, in our view.
We couldn’t have put it better ourselves.
There’s no point blaming speculators, short sellers, rumour mongers for your problems when the issue is closer to home.
Related links:
Greek provisioning, SocGen style – FT Alphaville
SocGen’s ‘hard facts’ – FT Alphaville