With these large banks like Danske Bank you have a definite problem: Crossholding – where A owns B that owns C which owns A. That is one way of pumping up equity.

Danske Bank

This extends to loans where A lends B etc. and guarantees.

As to assets you don’t have a clue: They depend on the state of impairment. That is why the Basel III rules prescribe somewhat objective measures for what a “bad” loan is: Such as lack of collateral, state of default. That didn’t work, as the CB’s had to lower interest rates to 0, which make it pretty damned hard to default if the bank does not demand repayment. So that didn’t go anywhere, which was just what the banks wanted.

That has been the standard technique of Japanese banks for a quarter of a century if I’m not mistaken.

Next step is – like the ECB and the new Bank Union does – is to take classes of assets – like farm land: What yield can you expect of that farm – reasonably run – with corrections for soil conditions and world market prices – plus a modest income for the farmer. Anything above that in juniority is a bad loan and has to be impaired.

Same thing with rental buildings. What rent can they expect? Deduct maintenance and you end up with a yield on capital. And in that way get a fair estimate of value.

This method generally stops when there are no buyers at the price. One way is to let the underlying businesses run into bankruptcy – farmers can’t farm without further credit extension. Then convert loans into long term mortgages connected to the real estate and not the farmer. This to prevent a sudden gain if/when farm prices go up again.

Apartment blocks will suffer under an overestimate – simply because nobody will pay the rent if there is an alternative – that leads to rent losses. Particularly in countries like Spain where there is 1½ homes pr. household.

None of this will make banks take losses. The more extreme cases might be resolved in this manner, but nothing really substantial. Especially as banks – given a reasonably sober asset evaluation – are all bankrupt.

This does give rise to Basel III demands for better consolidation of “systemic important” (or SIFI’s) banks. As no sane investor will put up money for recapitalising the smouldering hulk that brings us exactly nowhere!

There are two ways being pursued at the moment – one only applicable in Europe:

1) Which state or government is ultimately liable for the bank? This leads to withdrawals from one country back to the main licensing country. And their Bank Inspection. We saw on Cyprus, where, at the hight of the crisis the subsidiaries in Greece was sold off – that could only be achieved by massive impairments (with a guarantee for the rest) on assets: You saw depositors losses jump from 20% to about 40% overnight as the Cypriote banks left Greece.

The same thing has been seen in Ireland where Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) has withdrawn (nearly all) from NIB (National Bank of Ireland) haemorrhaging to this day very heavily. I think over the years about half the assets of NIB must have been written off.

That is the problem with the Swedish banks – besides Sweden – the major four IS the financial sector in four other countries and SIFI’s in two others. There is no way Sweden will be able to cover those losses. Already the exchange rate is killing Swedish businesses (that is up against the brutally efficient German industry). Very complicated, but the banks interest diverge sharply from the national economy’s.

As late as end of March 13 Russia made a simulated attacks on Sweden with two strategic bombers (Backfires) escorted each by two long range fighters (Flankers). The Russians were very specific to stay away from the two Danish F-16’s scrambled from Lithuania and escorted back home.

The Swedes did – nothing! It was a bit hard keeping it a secret as probably the best air defenders had held the Russians hands: To the utter embarrassment of Sweden.

In the wake of Cyprus one possible interpretation is that the Russians dare Sweden to repeat the trick in the Baltic countries (and Finland) and leave the Russian depositors holding the baby. No other explanation has been forwarded.

That was withdrawing from foreign lands.

2) The other way is to remove the good loans from the banks portfolios.

These bad loans weighing down the banks do have to be financed. That is generally done by quantitative easing (QE) letting the banks get credit from the CB’s at a very low rate. Fine and good for the banks?

Not so! These loans have to be backed by collateral in the shape of “good” loans in the CB. When the debtor hears of this, he might be interested in other terms and might be eligible for alternatives – such as business bonds. In the last month solid businesses in Denmark has refinanced their bank loans to bonds sold directly to investors and the CB’s loans to Danske Bank A/S (CPH:DANSKE) (OTCMKTS:DNSKY) have been shortened as well – so it is pretty clear what has happened.

The CB loans will end up being the most expensive credit for the banks – ever – as they take away the good business.

Small businesses have (in Denmark) gotten their credit terms eased as well by extending the tax credit on payment of VAT. Thus only paying the VAT when their customers have paid them.

The third method – where work is still in progress – is getting the good fixed rate real estate annuities away from the mortgage banks. Leaving the banks/mortgage banks only with the bad loans.

The general plan seems to be to incarcerate the bad debt in the banks with low interest rate loans. Simultaneously getting the good debt (and deposits for that matter) away from the banks by various means to funnel the legitimate credit demand to investors directly.

That is indeed possible, as all this extra liquidity from the QE has to go somewhere.

There are major reservoirs:

A) Sovereign bonds with a 1% interest rate in case of Germany – but that will open the investors to critical perusal of the German Tax Inspection. Anyway with an interest rate that far below inflation – it is just another way for investors to pay tax.

B) CB deposits which again are so lowly yielded (negatively in case of Denmark) that any alternative where there is a fair chance of getting your money back is attractive.

C) Flight into gold or raw materials, which is the normal refuge of the idiot. This does come up against the ticked off might of the Bundesbank with the second largest gold reserve in the world. Now just rumouring that Cyprus would be forced to sell off

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