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Why European Banks Are In Big Trouble

Posted On June 29, 2018 10:04 am

Why European Banks Are In Big Trouble

Sometimes we take the wrong things for granted.  How your car actually works – God, Martha, it takes a HUGE website to explain it!  Thankfully you can ignore all that if you have a trustworthy mechanic and know where to put the gas in. Air conditioning?  Smoke and mirrors as far as I’m concerned; how can compressing a gas result in cold air for my house?  

Banking – it’s simple right?  You put your money in, they loan some out and collect more back – sounds perfectly safe.  Not quite so fast there Junior, banking has risks too. In Finance 101, they present banks as the safety nets, then in Finance 2 you learn the truth: ain’t nothin’ safe.  Banks face two major risks, insolvency and illiquidity.  Illiquidity is easy to understand. You need enough cash flowing in to pay out current obligations every day/week/month.  Simple.

Insolvency, on the other hand, is a bit more murky. Aren’t loans guaranteed by collateral? Wouldn’t the bank just drive by and pick up Uncle Teddy’s Cadillac if he didn’t make his payments?  There’s a lot more to it than that, especially in these days of fiat money and ever-changing markets. Today’s featured read is a short paper from the DeGussa group explaining banking risks in a very clear, straightforward manner.  Especially as it relates to European banks and the huge issue they’re facing.

I really wish this paper was out back when I was in school, would have saved a weekend of hard slogging through some awful finance book, written by someone who clearly liked to hear themselves think.

 Related: Russia Ramps Up Gold Production – And They’re Ahead of Schedule

Originally posted at Mike Hammer – The Gold Enthusiast

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