A Forex View From Afar

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Another Bank Has Failed

Written by A Forex View From Afar on Friday, January 09, 2009

Commerzbank is the latest bank that required government intervention to shore up its balance sheets.

The German government injected 18 billion euros, in two trenches, to save the bank, gaining 25 percent ownership plus shares. This means that under the German law, the bank has been nationalized. Commerzbank required 10 billion euros this week, after two months earlier the bank received another 8.2 billion euro.

Another bank failure should not be a surprise, however, because of the timing, it raises some eyebrows. From every point of view, financial markets have stabilized in the last few months, and even started to show some signs of improvements. Therefore how can the bank explain the sudden need for another 10 billion euros, when the bank’s capitalization is roughly 4 billion euros? Furthermore, central banks from around the world accept every possible asset the bank could produce at every hour of the day. The second question that the “bankruptcy” raises is how come the bank did not use any of the lending programs made special for such cases?

Maybe this was only one particular case, but since a number of banks said write-downs might resume in the first quarter, chances are we are going to see some other banks failing too. In such a case, it will be interesting to see the market’s reaction, since bonds, the usual safe-assets, are already at ultra-low levels.

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