What Is It That Six Of The Fourteen German State Banks Are Hiding In Not Publishing Details Of The Debt Holdings As Required By The Stress Tests Standards

The Irish Times notes that six of the fourteen German banks tested – Deutsche Bank, Postbank, Hypo Real Estate, mutual groups DZ and WGZ, and Landesbank Berlin – did not publish the expected detailed breakdown of sovereign debt holdings, fuelling suspicion they had something to hide.

Arnoud Vossen, Secretary-General of the CEBS, said it had agreed with all supervisory authorities and with the banks in the exercise that there would be a bank-by-bank disclosure of sovereign risks but officials from the German regulatory authorities – Bafin and the Bundesbank – said local law meant they could not force banks to publish such details.

The Landesbanks, that is the Landesbanken are a group of state-owned banks unique to Germany. They are regionally organised and their business is predominantly wholesale banking. They are also the head banking institution of the local and regional bases.

What they are hiding is the great size and plummeting fall of the shadow banking system, that is, the once lucrative seigniorage money creation system, that sprung up from financial deregulation that accompanied the repeal of the Glass Steagall Act, and operated in parallel with the traditional central bank sovereign debt seigniorage system.

The debt deflation of the shadow liabilities, that is those assets kept off balance sheet in SIVs, creates systemic risk as they impair traditional current account deficit funding. The plunge in shadow liabilities that has recently accelerated, will likely be the major contributing factor in a bond market collapse led by US Treasury bonds failing at auction as Nassim Taleb relates, ”We Are Going To Have, At Some Point, A Failed Auction”.

It is the credit deflation of the shadow liability system, identified in “Shadow Banking,” a staff report authored by Zoltan Pozsar, Tobias Adrian, Adam Ashcraft and Hayley Boesky, that could easily make the day of the failed auction come very soon, and the economic dislocation be more severe.

Suggested reading for inquiring minds includes the following articles:

Tyler Durden, ZeroHedge article Will The Record Plunge In Shadow Liabilities Impair Current Account “Shadow” Deficit Funding And Guarantee A Double Dip?  … and

 Ezra Klein of the Washington Post article 5 Places To Look For the Next Financial Crisis … and

 Annaly Salvos, SeekingAlpha article NY Fed’s Paper On The Shadow Banking System Of Vast Importance … and

 Possner Pinch Minyanville article Liquidity in Economy Never Higher, Yet Banks Growing More Illiquid who relates: “Liquidity in the overall economy has never been higher, yet banks are growing more illiquid as they reach for yield. Loans aren’t liquid. Hedge fund investments aren’t liquid. CRE holdings aren’t either. Which leads to some interesting questions. If, as David Merkel suggests (rightly, in my view) that in this day and age monetary policy is synonymous with credit policy, how much looser can policy get? And given the implosion in lending that has happened in this economy, will anyone care?” …. I care because I am concerned the liquidity squeeze could like to liquidity evaporation thereby creating systemic risk ….. and

Andrian Ash, Daily Reckoning article Credit Deflation Lands In Britain relates how the UK is going to recapitalize and re-liquify its financial institutions:

I have a negative outlook on the European Stocks, FEZ, and the European Financials, EUFN,  for a number of reasons

 

The wholesale funding markets have closed. I have no hope, repeat no hope whatsoever that these will reopen.  And I fully expect that Banks to start once again to rely on ECB liquidity or else there will be extreme deflation in their stock values.

 

The Euro Interbank Offered Rate, EURIBOR, interest rates charged by banks to one another is low now because the value of the Euro, FXE, has risen; once the Euro starts to fall, the EURIBOR will rise. 

 

I am not expecting too much more of a rally in the European Stocks, FEZ, or the European Financials, EUFN, as the stress tests were too weak to generate a “turning point” from debt deflation that commenced April 26, 2010.