Heightened concerns about the global banking sector are front and center today. There are two press articles to note. The first is the FAZ story warning that the two regional banks that hold a majority stake in West LB indicate they are prepared to let the bank become insolvent. This may be an attempt to force capital injections by the German government. At least 6 bln euros may be needed by the end of the month. The second is an FT article reporting on an S&P study on the financial strength of large banks ahead of the new revised Basel II rules expected early next year. Simply put, some banks are better capitalized than others. S&P says, for example, that Japanese banks are among the least capitalized. Fitch echoed this sentiment noting the weak loan quality and poor capitalization by international standards. The Topix bank share index lost almost 4% today. At 131.12, it is within a few percentage points off the multiyear low set in March near 125.65 and puts the index 30% off the highs set in mid-June. In contrast, the IXM, which the Financial Selector Sector Index, behind the XLF exchange trade fund, finished yesterday at 147.56, 12.4% off the year’s high recorded in mid-Oct at 157.20, and 155% above the March low. Separately, the IMF’s Strauss-Kahn warned that only half of bank losses have been recognized and that many banks were undercapitalized. As of Sept, the IMF had estimated that banks held $1.5 trillion in toxic assets. In the US news reports indicate that the Fed has asked nine of the banks that received TARP funds to submit plans for repayment. The 9 banks that were part of the stress test earlier this year took a little more than 20% of the $700 bln TARP funds. Lastly, in the deluge of bank sector stories today, note that concerns over Chinese banks for new capital helped fuel the largest sell-off of the since the end of August. China’s five largest banks submitted to the government preliminary plans to raise capital. While US and European banks need to raise new capital to replace the capital lost, Chinese banks lent a record CNY4.7 trillion (roughly the size of TARP) and need to rebuild its capital to hit the capital ratio targets. These concerns taken en toto have encouraged some selective reduction of risk appetite today.
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