Europe’s bank meltdown will hit home here (US)

Europe’s bank meltdown will hit home here - Commentary: Without more capital, banking dominoes wobble

Simply put, Europe’s banks look to be on the brink of collapse.

Don’t take my word for it. The Bank for International Settlements issued its quarterly report on Monday. And the outlook is more than just gloomy.

“The intensification of the euro-area sovereign-debt crisis went hand in hand with banking-sector weakness,” BIS researchers observed. “While bank funding problems had manifested themselves throughout the year, policy makers and market participants increasingly turned their attention to issues of bank solvency.”

And “participants” did not like what they found. Standard & Poor’s downgraded two French banks, four Spanish banks, seven Italian banks and three Greek banks.

Moody’s Investors Service was more aggressive, slashing the previously “strong” financial systems. It downgraded three German banks, three British banks, and two U.S. banks.

BIS points out that part of the problem is bank debt, nearly $2 trillion needs to be refinanced before 2014. Some 13% is owed to governments from the last round of bailouts. European central banks have loaned 600 billion euro to banks as inter-bank lending has dried up.

“The cost and terms of credit deteriorate,” BIS researchers wrote.

All very interesting, you might be thinking, but what does this have to do with me?

So what does this mean for the average American? For one, the outlook for investment is not good. Brokerages are doing less market-making and less lending to investors. That means there are fewer buyers and sellers to trade with.

Secondly, banks are in desperate need of cash for reserves. That means they’re unlikely to lend more, or pay interest on deposit accounts. Even though interest rates appear to be falling, the number of people actually getting credit on those terms is shrinking.

That’s what’s happening now, but it could get worse very fast. The markets on Monday reacted poorly to another summit of European leaders aiming to fix the crisis. If confidence isn’t restored, banks will soon hit a cash crunch.

What happens next would be a panic. Some banks may not survive. And if you think it will stay contained in Europe, BIS has news for you: we live in an era of “global spillovers,” the bank said.

Ultimately, that could mean European bank woes would trigger a global recession not unlike our financial crisis of 2008. U.S. banks will be stung, if not by their holdings in suspect sovereign debt, then in their indirect holdings in private hedge funds, pension firms, insurance and credit-default swaps. If it sounds familiar, that’s because it was the same toxic mix that gave us American International Group Inc. Lehman Brothers, and ultimately at $1.2 trillion in government guarantees to the market.

For the little guy that meant lost jobs, lost credit, foreclosures and a world of economic hurt. That’s why Europe is nearer than you might think. It doesn’t get any closer to home than losing your home.

Really need to see the global inter-connectedness that threatens the global banking system despite moves to avoid the contagion. The fact that the US are constantly on Europe's case to get their act in order is evidence of the deep and dire concerns held toward a European meltdown. I think 2012 is going to be one very interesting year.

The best thing anyone can do at this point to mitigate any loss is to pull your funds to a local bank or credit union. These banks/credit unions are far less likely to be intertwined with the global financial mess that's about to unfold. I can see a run on the big banks when the Euro falls.