Death by Deleverage
0Watching the European banks announce their deleveraging plans one by one feels like watching an avalanche in slow motion.
Each bank over the last few months has been laying out its individual plan to cut assets due to funding strains and to minimize capital needs to comply with increased banking regulation. As an example, UBS announced Thursday its $130bn deleveraging plan, most of which is planned for the next 12 months.
UBS’s cut is focused on their investment bank, the most international part of the bank, which will significantly reduce its commitment of capital outside of Switzerland.
Looking at each plan individually, the plans might make sense (i.e., each bank in a vacuum has good reason to cut its assets), but when looked at in aggregate, it seems clear that the plans cannot work without creating devastation.
We have added up all the plans and the implied deleveraging cannot work, because the magnitude of the assets for sale are inconceivably large versus the potential private sector buyers, and even the plans to just let short-term lending roll off would have devastating consequences for the economy.
When the US banking system faced similar circumstances in 2008, only the nearly unlimited response by the Fed and the Treasury ended the death spiral.
As you know, it seems to us either something of that magnitude will be coordinated in Europe, or the deleveraging will enter an uncontrolled phase.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
