Monday, 16 June 2008

Sovereign wealth funds losing interest in failing banks

(Click on the chart for a sharper image)

According to the latest Bank of England quarterly bulletin, sovereign wealth funds appear to have stopped pouring in cash into under-capitalized north american and european banks. During the second quarter of this year, banks needed around $100 billion of additional tier one capital. However, the cash rich sovereigns provided virtually nothing.

This particular method of recapitalization reached a peak towards the end of last year, when Citibank and others asked rich investors in Asia and the Middle East to bail them out. More recently, the sovereign investors have contributed less. Instead, banks have been forced to rely on their own shareholders for funding through rights issues.

Banks have also relied on hybrid capital securities to supplement tier one capital. These securities are essentially debt instruments that have some features like equity, such as coupon suspensions and principal write downs.

Why have the sovereign wealth funds disappeared? Perhaps, these funds have begun to appreciate the extent of banking sector difficulties in North America and Europe.

Of course, shareholders also have a limited interest in bailing out failing banks. So what happens when banks can no longer rely on the private sector to replenish capital levels? Watch out, the banks will be looking to the public sector for a bailout.


vodka drinker said...

Just eyeballing the chart, banks have probably tapped others for about $25 billion of additional capital in the last year or so. I bet that isn't even the end of it.

Edward Harrison said...

It's about time the SWFs stopped throwing money away. Will Barclays get the dosh or will they have to do a rights issue? A lot of people in the city are sceptical about their numbers. Very rosy picture compared to the likes of HBOS and RBS. I, too, am sceptical.

Mark Wadsworth said...

Hurray for SFW's, it's like free money!

Anonymous said...

What would citi do without SWFs?

Nick Drew said...

SWFs vary widely in character of course, but some of this is - or has been - truly dumb money - (we've been covering this for a while at C@W).

One aspect we've noted is that Private Equity has often been front-running the less imaginative SWFs: the PE sector has the deal-making skills to (e.g.) take public companies private, or pimp private co's: PE then 'warehouses' and packages the assets and sells them on for a tidy turn.

With PE a little less active of late, shall we say, & hence less able to arb the valuations of Wall St and SWFs (whch often requires taking the assets at least temporarily on their books) this type of SWF deal-flow has been interrupted.

Anonymous said...

No more easy money for banks so it is time to squeese their shareholders.

aSteve said...

I'm intrigued by the "Hybrid securities" - are these really the hard-to-value mortgage backed securities, I wonder?

Anonymous said...

I've been wondering for a while how banks and the business press just assume capital can be raised. Obviously it needs somebody with cash prepared to do so.

As the past few capital raising efforts have shown, it's like standing next to a bonfire and throwing packs of banknotes onto the pyre.

The SWFs have been burned already. There's still enough dumbass PE and retail suckers out there, so that's where everything is focused right now.


Mark Wadsworth said...

Chaps, don't forget this is a two sided equation.

For every £1 of money they lend, banks have to create a deposit account for the vendor. Banks are just middlemen.

If UK banks did the decent thing and raised let's in extremis £50 bn in rights issues, that's less than 5% of all 'cash on deposit'. So the banks would just be converting an actual liability (to the depositor) to a non-repayable liability (share capital).

CityUnslicker said...

Don't see how RBS 's rights issue is a failure by any standards. The bottom has been reached in the UK banking market; although US exposure to sub-prime could still take a big name down there for the rest of the year.

Don't forget too the asians and arabs bought sub-prime too, they just don't have to report it. This is all hidden write-offs.

powerman said...

US sub-prime isn't he only problem out there. Ireland, the UK and spain have some catching up to do. That's been securitised and spread around the banking system too.