New Rules Will Derail Europe’s Financial System In 2018

Europese crisis Portugal

The mainstream media has been focusing on only one thing last week, and that’s the relatively surprising victory of Donald Trump in his bid to become the next president of the USA. Despised by practically all media outlets, it was the talk of the week, but we’d almost forget there are real problems in this world.

Few of you might know the banking sector will need to implement IFRS 9 as its new accounting standard on January 12018, but now, 13.5 months before the due date, the European Banking Authority is ringing the alarm bell.

As per the new rules, banks will have to book a special reserve on its balance sheet the moment the loan is being given to the borrower, as opposed to the current system which only requires banks to write down the assets once the payments haven’t been made in time. While this does seem to be a commendable move to try to clean up the banks’ balance sheets, this might be overkill as it would be unique to put provisions aside the moment the loan has been extended (using the ‘expected credit loss’ model versus the ‘incurred loss’ accounting model).



This will obviously have a negative impact on the capital ratios, and the EBA says that approximately 80% of the respondents on its survey will see their capital ratios decline by approximately 75 basis points, putting additional pressure on the entire financial system.

As you might remember, we have written several columns discussing the most recent stress test of the European Central Bank and EBA, and unveiled that some banks weren’t even announced in the EBA’s press release even though they completely failed the stress test. Even Deutsche Bank would have failed the stress test if it hadn’t have been granted ‘special measures’ that other banks subject to the stress test weren’t allowed to use.

But the issues don’t remain limited to the commercial and public banks. The ECB’s asset purchase program is ongoing and causing severe distress on the balance sheets of the national banks (where the purchased assets are being held). Unfortunately the central banks don’t have to disclose interim reports so we can only make educated guesses as to how much the Euro-countries have added to their balance sheets. But if you’d pull up the numbers from last year, you’ll see some shocking results.

The Bundesbank in Germany saw the position on its balance sheet related to ‘securities held for monetary purposes’ increase from 50.2B EUR to 172.3B EUR, an increase of 122B EUR. The total balance sheet of the Bundesbank increased by a stunning 31% in one year, to 1.01 trillion. This increase of 240B EUR represents an increase of 3,000 EUR per German citizen, and close to 5,000 EUR per employed German.


Source: Bundesbank

And this was just the start. The asset purchase program continued in 2016, and we estimate the Bundesbank had to purchase an additional 110-140B EUR of ‘securities for monetary purposes’, forced by the European Central Bank. This would push the total position on the balance sheet to roughly 300 billion Euro, or 11% of its GDP.

Don’t the central banks see the risks associated with this forced asset purchase program?

They do.

One of Germany’s neighboring countries, Belgium, seems to think this expanded asset purchase program won’t end well for anyone involved in this scheme. Surprisingly, the Belgian National Bank is listed on the stock exchange, with the Belgian government owning 50% of the shares. We won’t go into any details on the shareholders structure, but want to draw your attention to a press release from earlier this year.

Apparently the National Bank of Belgium deemed it necessary to change its dividend policy, but this press release contained another very interesting feature.


Source: National Bank of Belgium

So suddenly a member of the ECB-system is openly talking about ‘quantifiable risks’ for the financial system associated with the ‘unconventional monetary policy’ and decides to put 300M EUR per year aside to cover these risks? This isn’t just a one-time item, as during the annual meeting of its shareholders in 2015, this Central Bank specifically mentions the risks for the financial system associated with the Asset Purchase Program when/if the interest rate increases again.


Source: National Bank of Belgium

The financial system in Europe is still shaking to its foundations as both the commercial banks and some of the national banks are ringing the alarm bell. The European Union simply cannot afford higher interest rates as this could collapse the balance sheets of the central banks that are part of the Euro-system.

And if at least one local central bank thinks it’s risky to add this much low-yield assets to the balance sheet, why would we sleep well at night?

Disclosure: None. For our free guide to gold, go to   more

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Gary Anderson 7 years ago Contributor's comment

So, banks are hoarding #bonds for this new rule and #banks are hoarding bonds as non banking financial institutions play a dangerous game of basing their collateral stability on equities as collateral. That appears to be another slippery slope: