Tuesday, July 24, 2012

Eurozone banks are pulling out of the US

Back in December we discussed how lack of access to dollar funding will push Eurozone banks out of the US. That's not because these banks don't like US lending. It's simply due to the fact that European banks generally rely on domestic euro deposits for funding (exacerbated by increased capital requirements). To obtain dollar funding however they used to issue commercial paper and sell it to US money market funds. But US money market funds walked away from this CP last year to avoid exposure to the Eurozone. This left Eurozone banks with no access to dollars except via the Fed Liquidity Swap (or converting euros into dollars and hedging the position via currency basis swap, which became extremely expensive). Here are a couple of posts on the topic: Post 1, Post 2.

This unwind of US assets is in fact now taking place and US banks are the beneficiaries.
FT: - France and Germany, led by BNP Paribas and Deutsche Bank, still have some of the biggest foreign operations in the US. But French financial groups including BNP, Crédit Agricole and Société Générale have announced plans to shrink their balance sheets.

US assets owned by German banks have fallen from their $427bn peak in 2007, to $267bn as of March. Assets held in the US by French bank-owned offices have fallen from $420bn in December 2007 to $373bn, according to the latest Fed data.

The pullback by banks from smaller eurozone countries is even more stark, as their banking systems come under severe pressure. US assets owned by Irish banks plunged from $130bn in September 2008 to $3.6bn as of March.

Wells has been one of the more active US banks in buying assets from European competitors. The company recently snapped up a $6bn loan portfolio from WestLB, the troubled German Landesbank, as well as the North American energy business of France’s BNP.

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