The European Central Bank held a borrowing party today and everybody came.

A whopping 523 EuroZone banks borrowed a huge 489 billion euros ($638 billion) at the central bank’s first offering of three-year cash.

That’s enough to refinance 63% of the debt, as estimated by Goldman Sachs, of EuroZone banks that will mature and require refinancing next year. The European Central Bank’s next three-year funding will be held in February. At this rate EuroZone banks will be able to pre-fund all their refinancing needs for 2012 and into 2013 that month.

This is either a big step forward in assuring the stability of the European banking system or the next step in building a horrifyingly risky Ponzi scheme. Read more

Stocks soar as world’s central banks move to support big banks just hours after S&P downgraded them

Put that in your new ratings model and smoke it, Standard & Poor’s.

Hours after Standard & Poor’s downgraded 16 of the world’s biggest banks—largely because the company’s new model for awarding credit ratings decided that governments were less likely to support their big banks—six of the world’s central banks, led by the U.S. Federal Reserve, came to the support of the world’s big banks.

In a coordinated move the central banks lowered the cost of emergency dollar funding by 0.5 percentage points. By lowering the cost of dollar funding from the central banks, the move will make it easier for stressed European banks to fund their dollar-denominated activities. The cost to European banks to fund in dollars had climbed to the highest level in three years.

On the news of the central bank move, the German DAX Index was up 4.9%, and the U.S. Dow Industrial Average had climbed by 3.7% and the Standard & Poor’s 500 by 3.6% as of 11:45 a.m. New York time.

Shares of the banks that S&P downgraded yesterday are performing even better. Read more

Euro banks opt to cut lending rather than raise capital–that can’t be good for growth

So much for the grand plan to buttress the strength of European banks by requiring them to raise $150 billion in additional capital.

In the days since the European Banking Authority announced that goal and spelled out which banks would need to raise how much, Europe’s banks have pushed back with their own plans to meet the new 9% capital ratio.

And to no one’s real surprise, the banks are opting to sell assets and shrink loan portfolios rather than try to raise capital in financial markets that have marked European bank stocks down, in many cases, below their book value. And banks look like they will do everything possible to avoid having to take government funds that would give politicians a say on dividend and bonus payments.

The latest estimate from Morgan Stanley is that of Europe’s 28 biggest lenders only eight will raise capital. And that the total additional capital raised will add up to just $15 billion instead of the $150 billion figure from the European Banking Authority.

I can see two effects of the banks’ decision—both negative. Read more

Update U.S. Bancorp (USB)

This is about as good as it gets in U.S. banking these days. Which is to say not great. But U.S. Bancorp continues to show that it’s more than ready to take advantage of the turn when it comes.

On October 19, before the New York market opened, U.S. Bancorp (USB) reported third quarter earnings of 64 cents a share. That was 2 cents a share above the Wall Street consensus.

Revenue grew by 4.5% from the third quarter of 2010 and, unlike the big New York banks, U.S. Bancorp also showed sequential revenue growth as well with revenue up 2.2% from the second quarter of 2011. Revenue of $4.8 billon was comfortably above the $4.71 billion expected by Wall Street.

The fundamentals of the bank’s business remained very solid. Read more

Just shows you should never believe the headlines when it comes to quarterly earnings—especially for banks right now.

According to the headline numbers, third quarter earnings at Citigroup (C) climbed by 74% to $3.8 billion. The headline number put Citigroup’s earnings per share at a huge $1.23. So according to the headlines, Citigroup killed this quarter since Wall Street had been projecting that the bank would earn just 82 cents a share for the period.

Just one tiny problem—the headlines are misleading big time. $1.9 billion of the bank’s $3.8 billion in earnings this quarter are due to a very quirky accounting gain. I say quirky because the $1.9 billion is the result of a decline in the bank’s credit quality. When a bank’s credit quality declines, accounting rules say the bank should revalue the debt that it owes its creditors. The theory is that debt is now worth less because the bank’s creditors think there’s a greater chance that the bank will default. The effect is that as a bank’s credit rating–as expressed in the market for credit default swaps—drops, the bank gets to record a big accounting gain on its debt. That’s where $1.9 billion in Citigroup’s earnings came from this quarter.

Of course that $1.9 billion gain is all on paper. Read more