Subprime shock waves damage European banks

Proshare

December 11, 2007/Busrep

 

Four European banks - UBS, SachsenLB, Lloyds TSB and Societe Generale - have revealed delayed strains from the US home loan crisis that is shaking global finance four months after it broke in August.

 

On short-term interest rates, vital for banks to refinance immediate needs, there is renewed market tension.

 

This led European Central Bank board member Lorenzo Bini Smaghi to say on Monday that the strains reflected \"concern about cash requirements at the end of the year\" but this was misplaced because central bank policy of \"stabilising overnight rates will continue\".

 

UBS and SachsenLB have been hit so hard by exposure to the

US subprime mortgage crisis that their capital bases have been weakened.

 

On Monday prestigious Swiss bank UBS made a record write-off of $10 billion and announced that the hole was being plugged mainly by the Singapore state investment fund, as well as an unnamed Middle East investor.

 

UBS warned of a loss in the fourth quarter and possibly for the year, and said it needed $17.1 billion of new capital.

 

The sudden arrival of the Singapore fund occurred only days after the Organisation for Economic Co-operation and Development had focused on the rising importance of sovereign wealth funds from emerging countries as corporate investors to recycle huge inflows of foreign reserves.

 

Analysts said UBS, by acting radically and quickly, wanted to reassure investors it was putting nasty surprises behind it.

 

In Germany, the mortgage shock could have a big effect on SachsenLB, according to a group of experts who estimated the regional state bank\'s exposure at E43 billion (R423 billion), said the Sueddeutsche Zeitung.

 

It said the fallout could overwhelm an emergency rescue organised for the bank after the US crisis emerged.

 

At leading UK bank Lloyds TSB, which puts its subprime damage at E280 million, managing director Eric Daniels said a \"low-risk\" strategy had limited fallout, but the past few months had been one of the most difficult periods in global finance for a generation.

 

In France, Societe Generale said it was going to bring back into its balance sheet assets covered by a structured investment vehicle (SIV) because otherwise it faced a possible problem of liquidity after a decision by Moody\'s Investors Service to put the fund on negative watch.

 

SIVs contain long-term assets that are often linked to US property assets now considered at risk and are refinanced by short-term commercial paper.

 

The bank is taking responsibility for refinancing the assets, worth E4.3 billion, if investors want their money out.

 

Societe Generale\'s main objective was to protect its credibility, said Richelieu Finance analyst Benoit de Broissia.

 

UK bank HSBC has consolidated two such vehicles after injecting $35 billion, and US bank Citigroup has a E64.9 billion exposure through six vehicles.

 

Such consolidations increase the immobilised shareholders\' funds, crimping the writing of new loans.

 

The essence of the crisis is that vast quantities of US home loans, on which poor borrowers defaulted, were restructured into complex debt instruments sold on international markets.

 

When the loans turned bad, financiers battled to identify the risks. Uncertainty restricted the money flowing on short-term markets, obliging some lenders to write off large sums.


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