The following is the latest from Minyan Peter, author of such popular recent articles as Bank Debt Downgrades: Surf's Up and Asset Deflation Driving Move Toward Recession.


As anyone who has worked in the treasury area of a financial institution knows, there is one focus to the month of December – get the balance sheet down. Why? So the year-end reported capital ratios look their best.

Under a normal environment, shrinking the balance sheet would entail scouring the investment portfolio for securities to sell at a gain, raising the cost of short term inter-bank loans so no one wants to borrow from you, and securitizing high yielding assets –such as credit cards – to book gains.

With significant write-downs taken already and more looming, along with the consolidation of previously unconsolidated SIVs and conduits, managing down the balance sheet this December will be more important than ever, and yet far more difficult to achieve. Credit markets are extremely thin, with the exception that Treasuries gains are harder and hard to find, and both inter-bank and corporate demand for bank credit is rising.

If there is a “pressure” gauge for financial institution balance sheet management, it's LIBOR. Investors in financial institution stocks would be wise to pay close attention to LIBOR between now and year end. At least so far, even with liquidity from the Federal Reserve, the Bank of England and the ECB, it appears that the pressure is building.

I know there are many who believe that financial stocks will experience a Santa rally. I, for one, would wait until January before stepping in on the long side of financials. LIBOR is well above the levels we saw at the August lows, and, given the extreme importance of this December’s year-end capital ratios, I expect that LIBOR will only move higher as banks go to extremes to manage their reported balance sheets.