Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Could France's Banking Problem Come to US Shores?

Mohamed El-Erian raised the alarm today about the health of French banks, going so far as to say that there appears to be an "institutional run" on the banks.

In the piece, El-Erian uses a few unorthodox metrics to determine whether there’s a run on the banks. Which made me wonder: how stable to US banks look if we apply the same metrics.

In general, America's banks are much healthier than Europe's. They're more transparent, have more secure deposit bases, better quality assets, better liquidity, a more reliable central bank, and less direct exposure to the sovereign debt of Greece, Portugal, Italy, Spain or Ireland.

One metric El-Erian uses to detect a run is the price of equity to tangible book value. French banks trade at 50 percent discount their tangible book value, Er-Erian writes.

Both Bank of America and Morgan Stanley are now trading at a 43 percent discount to tangible book value. Citigroup is at 46 percent discount. Those drastic discount that indicates that the market is very skeptical about the health and profit potential of these banks.

JPMorgan Chase and Wells Fargo, on the other hand, trade at a healthy premium to tangible book value. The discount for Goldman Sachs is just 29 percent.

Another metric El-Erian uses is the ratio of market capital to total assets. A healthy bank would have 6 to 8 percent, according to El-Erian.

Bank of America has $2.3 trillion of assets and just $62 billion in market cap. That gives it around a 2.7 percent ratio, above the 1 to

1.5 percent of French banks but far below the level El-Erian describes as healthy.

Morgan Stanley has $831 billion in assets and a market cap of $25.06 billion, which translates into a 3.0 percent ratio. Citigroup has just under $2 trillion in assets and a market cap of $68.7 billion, for a ratio of 3.4 percent.

Goldman has $937 billion in assets and a market cap of $46.8 billion, a ratio of 5.0. JP M Morgan has $2.2 trillion of assets and a market cap of $113.7, for a ratio of 5.1 percent. Wells Fargo has $1.25 trillion in assets and a market cap of $121.6 billion, putting it well above the healthy range at 9.73 percent.

El-Erian says the French banks are desperately in need of new capital.

We’re not in the zone of desperation yet. But the market seems to be sending a signal that at least some of our banks are unhealthy.

Of course, all the banks discussed above currently meet all regulatory capital requirements and maintain that their capital levels are more than sufficient to withstand all likely economic circumstances.

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