by behappyalways » Sat Oct 08, 2016 8:17 pm
From The Economist
Europe’s banks
The chronic continent
Deutsche Bank’s distress is symptomatic of a wider malaise
Oct 8th 2016 | From the print edition
IT MUST have been an exquisite moment. On September 30th the central bank in Athens issued a statement reassuring investors that the Greek banking system was safe—from a crisis engulfing Germany’s flagship bank. Any Schadenfreude felt in Europe’s periphery at Deutsche Bank’s tumbling shares should be stifled, however. Deutsche is not about to fail: it can survive a harsh funding squeeze, its solvency is not in doubt and if push came to shove, the German government would surely support it. But many of its woes are symptomatic of problems that bedevil the whole continent.
Plenty would deny that. Deutsche is more leveraged than its peers; it is unusual in lacking a crown jewel around which it can base a business model; and it has a stack of derivatives whose prices are hard to observe in the market. More positively, it is light on the non-performing loans that clog the balance-sheets of banks in places like Italy. But in other ways its problems have a very familiar ring. Deutsche is struggling to make a decent return. It has taken too long to face up to its problems. And the market it operates in is overbanked. Years after American banks were forced to clean themselves up, too many European lenders are still flailing as a result (see article).
Europeans prefer to blame others for the turmoil. Deutsche has lashed out at “forces in the market” for its most recent bout of trouble. But its shares had already fallen by 42% this year before news broke last month of a proposed Department of Justice (DoJ) fine of $14 billion for mortgage-related misdeeds. German politicians insinuate that the mooted fine represents revenge for Europe’s recent tax case against Apple, an American champion. Yet the DoJ has slapped large fines on American banks, too. Deutsche’s vulnerability to shocks is the problem, not the shocks themselves.
Fingers also point at global regulators. The boss of Credit Suisse, Tidjane Thiam, says his sector is “not really investible”. It is true that the rules have got much stricter in the past few years, particularly for institutions, like Deutsche, that have big investment-banking arms. It is also true that ultra-loose monetary policy, and in particular the negative interest rates that now prevail in much of Europe, eat away at banks’ profitability. But some banks cope better than others in this painful environment. The IMF has compared returns on equity before and after the financial crisis. Those at large European banks fell by 11.4 percentage points, whereas those at American lenders dipped by only three points. Rather than blaming speculators, Americans and regulators, Europe’s bankers and policymakers need to put their own house in order.
Within institutions, that means cutting costs and raising capital. According to S&P Global Market Intelligence, the average cost-to-income ratio at an American bank in 2015 was 59%; Italy’s figure stood at 67% and Germany’s at 72%. Scandinavian banks already operate with much lower costs than their peers elsewhere in Europe. The axe is now swinging: Commerzbank, another struggling German lender, and ING, a Dutch bank, have announced thousands of job cuts in the past few days (see article).
But more can be done. Pay is one obvious lever. Deutsche’s bankers trousered roughly the same amount in annual compensation between 2011 and 2015, even as the bank’s share price dived. And before shareholders complain too loudly about that, recall that in 2007-15 the dividend payments by 90 euro-zone banks amounted to €223 billion ($250 billion). Their retained earnings would have been 64% higher at the end of that period if they had not paid out dividends.
Within markets, consolidation is needed. Too much consolidation risks exacerbating the problem of overmighty banks. Too little, however, and earnings sputter. Some European markets have been clearing away excess capacity. Almost half of the decrease in euro-zone bank branches between 2008 and 2014 was accounted for by Spain alone. Again there is more to do. According to the IMF, 46% of European banks account for just 5% of deposits. Germany’s massed ranks of savings and co-operative banks, for example, drive down margins for everyone. Without pruning, their returns on equity are projected to fall towards zero as a result of ultra-low rates, regulation and “fintech” rivals.
Recovery would happen a lot faster if euro-zone policymakers grasped the simple truth that a banking calamity can unfold slowly as well as quickly. Bold solutions are needed. A deposit-guarantee scheme that stretches across the euro zone would encourage cross-border consolidation. Using public money to recapitalise the weakest banks in countries like Italy and Portugal, and requiring them to slim down in return, is the fastest way to return them to health. Proper fiscal stimulus by European governments would cut the chances that central banks have to keep interest rates so low. For questions about the survival of big European banks to be swirling almost ten years after the financial crisis started is utterly damning.
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