You’d think they would have learnt by now but obviously not. According to Reuters, a loophole created by the EU is allowing EU banks to load up on US city debt while only needing low amounts of capital against them.
Banks have been using global bank capital rules, favoured by the EU, to pile into US muni’s by using the rule that only small capital ratios are needed if the the country the bonds are located in has a strong rating. That is, even if the bonds themselves are low rated. The banks therefore earn high returns (as the low rated bonds carry high yields) in a high rated sovereign and don’t worsen their capital ratios.
Of course it’s a spiffing plan until a city like Detroit goes up in smoke. Commezrbank has already told investors that it has taken a huge hit from the Detroit default (though hasn’t given a number) and even bailed out Belgian bank Dexia is looking at a potential €59m loss.
Currently German banks hold €18.5bn in US muni’s while Italian banks have €800m. HSBC holds €800m with Santander €2bn in US state and municipal securities. BBVA has €1.4bn in exposure. Non-US investors hold $63.7bn of UN muni’s according to US treasury figures from March.
Now, if that’s not enough to get you banging your head on the table a senior regulator commenting on municipal debt said that banks and EU authorities were expected to apply “common sense” when investing in muni’s saying that
banks should considering much more than just the regulatory capital impact when they buy debt – such as whether a bond is a good investment or not.
I’ll now leave you to pass judgement
