Pushing to control a larger slice of the EU’s financial pie.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
There are plenty of reasons to be worried about the state of Europe these days, but if one had to choose one thing above all others, it would be the gaping disconnect between reality and senior European policy makers’ willful misperception of reality.
A perfect case in point was a speech given in Frankfurt by ECB president Mario Draghi. He was addressing a conference of the European Systemic Risk Board (ERSB), an organization created in 2010 by the European Commission to warn about and mitigate systemic financial risks in Europe.
When Small Is Evil
During his address Draghi discussed what he saw as the biggest threats to Europe’s financial system. Just as you’d expect from any senior central banker worth his or her salt, he did not point to the most obvious risk: the zombifying banks at the very top of the financial food chain — the same banks that coincidentally constitute the ECB’s number-one constituency and whose balance sheets are still filled to the rafters with toxic assets dating back to even before the last major crisis, in 2008. By now, virtually all of these banks are fully dependent on the never-ending and ever-growing welfare assistance provided by the ECB.
Nor did Draghi mention the excessive complexity and interconnectedness of the banking system, routinely fingered as potential causes of the next global financial crisis. Nor for that matter did he mention the destructive side effects of the ECB’s negative interest rate policy (NIRP), which – besides sacrificing millions of savers and retirees via their pension funds on the altar of rampant debt creation and completely undermining the crucial micro-economic role played by capital formation – is making it difficult for Europe’s largest banks to turn a meaningful profit.
No, for Draghi, the biggest financial problem in Europe these days is that it is over-banked. “Over-capacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins,” he said.
Put simply, there’s just too much competition from the thousands of smaller banks that are crowding out the profits for the big banks.
Consolidation and Concentration
The solution is clear: lots and lots of cross-border mergers that will finally convert Europe into a genuine single financial market, while also enhancing the concentration and consolidation of the sector. This is not the first time that the ECB has called for the two “Cs”. As we warned over two years ago, it was one of the crowning goals of European banking union.
One big problem Draghi faces in achieving this vision is that the ECB only has control over Europe’s 130 biggest banks. The other 6,000 or so smaller institutions — the local and regional savings banks and cooperative lenders that by and large continue to offer some semblance of financial service to local communities and businesses — are currently still under the supervision of national regulators.
As far as Europe’s most important national financial regulator, the German Bundesbank, is concerned, that’s how it should stay.
In Germany the two biggest lenders — Deutsche Bank, whose share got bashed down to record lows today, and Commerzbank — account for roughly one-quarter of Germany’s financial sector. The other three-quarters are made up of regional banks, local savings banks, cooperative lenders, and mutual associations that play a vital role in funding not just the small and medium-size firms of Germany’s Mittelstand but also global giants like Volkswagen.
For the German government and central bank, handing control of the remaining 75% of the country’s financial system to the ECB would be a step too far.
Zombie + Zombie = Super Zombie
Another major obstacle to Draghi’s plan to drastically thin Europe’s banking herd is the torrid state of many of Europe’s biggest banks. Put simply, very few banks want to buy or merge with other bank, since they have no idea just how serious their rival institutions’ problems are.
It’s no coincidence that mergers of Western European banks are at their lowest point in years, according to Bloomberg. In 2012, €49 billion was splashed on financial sector mergers in Europe. By 2015 that amount had shrunk to just €12.1 billion.
As the Bankia example amply showed, merging one insolvent institution with another (or others) merely compounds their problems. Bankia was spawned in 2011 from the ill-fated merger of seven insolvent savings banks, only to collapse in 2012.
What’s more, the European banking sector’s most serious problem is the level of concentration – the mega banks that seem to be able to keep growing – and the fact that their sheer size and systemic importance make them impossible to resolve.
In the ultimate irony, just across the way from where Draghi was blaming Europe’s financial problems on its smallest banks, the decline and fall of Deutsche Bank continues apace. In Italy, the country’s third largest bank, Monte dei Paschi di Siena, is even further down the path toward outright zombification. Judging by recent reports, Italy’s largest bank, Unicredit, is not far behind.
In each case, massive taxpayer-funded infusions are on the horizon, even if they contravene the new bail-in rules brought into effect at the beginning of this year. In the case of Deutsche, whose books are rammed full with highly risky derivative products, a bailout may not even be enough.
Finally, a bank that is ostensibly too-big-to-fail might actually fail, putting at risk the entire global financial system. In the meantime, Europe’s most senior central banker, who wants to grab more power by consolidating a larger percentage of the EU’s financial sector in his bailiwick, is worried about the competition risks posed by the continent’s smallest banks. By Don Quijones, Raging Bull-Shit.
With a stagnating economy, even supposedly good loans on the books of Italian banks may end up putrefying. Read… Italian Banking Crisis Turns into Mission Impossible
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
I remember reading somewhere that the crash of 1929 started with the failure of a European bank. Anyone know the truth about that?
I believe that depression got started as a result of America inventing consumer credit, then lowering rates to 3% to help goose the European economy. It drove an insane bubble on top of the existing bubble, which burst. Just as China is doing now.
Btw what this article reports is just frightening in so many ways. Tbtf should be changed to simply ‘ too big’, and the cos then broken up. Competition within markets governed by sound laws lead to meritocracy and broad wealth. What’s happening now are secular trends leading to long term decline and malaise. What fun.
A recent analysis said post WW-I, US industry grew rapidly on exports to Europe. When Europe hit the wall as Germany could not pay reparations, demand tanked and US was over capacity as markets shrunk. Like China today? Too simple an analysis? Ockham’s razor?
You may be aware of the SECRET FSB Regulation,signed by the G20-member countries,in Australia,November 2014.This is to save the TBTFs.
Creditanstalt, an Austrian bank. Their bankruptcy was the proximate cause.
For the cause, look to the FED, of course. Go to https://mises.org/library/americas-great-depression
America’s Great Depression by Murray Rothbard
“This book applies Austrian business cycle theory to understanding the onset of the 1929 Great Depression. Rothbard first summarizes the Austrian theory and offers a criticism of competing theories, including the views of Keynes.
“Rothbard then considers Federal Reserve policy in the 1920s, showing its inflationary character. The influence of Benjamin Strong, the Governor of the New York Federal Reserve Bank, was especially important. In part, his expansionary policy was motivated by his desire to help Britain sustain the pound. Strong was close friends with Montagu Norman, the Governor of the Bank of England.
“After the 1929 crash, Herbert Hoover followed an interventionist policy that prefigured the New Deal. He favored keeping wage rates high and thus contributed to rising unemployment. Against the popular stereotype, Rothbard shows that Hoover was not a partisan of laissez-faire.”
Roosevelt made matters much worse with his fascist policies. The Depression continued through WW2, when after the war many of the economic controls strangling the economy were lifted. See Robert Higgs on the fallacy that WW2 ended the depression. It didn’t, just covered up the signs of depression, such as unemployment. When all the unemployed are drafted, it sort of “solves” that problem.
Mises – Rothbard – libertarian nonsense – revisionist history made to fit the ideology. Surprised you didn’t mention good old Milton F.
If a reader wants an in depth understand of finanicalization, bubbles, economic history, how the system is rigged, and how mainstream economic thinking is nonsense (and especially old school neoclassical economics like the Austrians) – steer clear of these links unless you want to practice your debunking skills. The neoliberal, libertarian and austrian school economics is nonsense. Instead try reading a few books by Steve Keen, Michael Hudson, or Jack Rasmus.
I took your advice and looked up Keen on Wikipedia and went to the review listed in the references there by two Austrian Economists and I feel that they skewered several of his assumptions very well.
Interesting also is that Roosevelt resisted implementing Hoover’s emergency Bank plan between the election of 1932 and taking office in late March of 1933, refusing to communicate with the outgoing administration for 5 months while the situation became more and more critical. After taking office, Hoover’s Bank plan was implemented, and the speech used to announce it was the one written by Hoover’s assistant Treasury Secretary … no credit, of course.
Indeed. A bank in Vienna Austria my home country. I don’t which but a commerce bank. I’d guess CA the Rothschild Bank. It grew during the process of industrialization …
Compared to the risk the Austrian Banking system has taken before 2008 GS is a shrinking violet. Our banking system’s exposure was around 3 times the Austrian GDP. Austria is still financing lots of the bubbles in East Europe. Real Estate bubble before 2008 afik. a consumer debt bubble today (maybe not that big at the moment).
On the other hand. If you want to make money you need to risk something. Usually Austrians should be invested in gold, silver and other currency replacements like Vodka or something like that.
It was a Rothchild Bank in Austria that was the first Domino. By the end every European Nation has defaulted on its sovereign bonds in 1932, China also defaulted.
This is what is going to happen again. NO ONE is safe.
Here in the UK it will be time to say good bye NHS and many pension schemes will blow up.
When the great depression happened the Govt sector as a % of GDP was far smaller than what it is today. As a result today the Govt can deficit spend and increase the amount of money in circulation while the private sector money supply contracts due to bankruptcies.
There’s no need for the NHS to disappear, only credit money will disappear which are just IOU tokens, all the technology and educated personnel will still remain in place, though pension schemes will definitely go bust, these can be replaced by a basic income scheme which can be used to replace all other govt subsidies.
Financial crises are quite regular historical events and nations do survive them and have survived much worse, the question is what shape will society take after. Some thoughtful policy considerations today could greatly reduce the coming hit.
Um, the fact that government spending was much lower as a percentage of GDP back then made it easier for government to expand, not harder. Now, we have government spending in excess of 40% of GDP in most western nations, with some over 50%. If you increase government spending from 5% to 20% of GDP, you are making a massive injection of stimulus. If you increase from 50% to 65% of GDP, how much difference does that really make? And where exactly is the point where you start seeing diminishing marginal returns? Or have we already past that point, and all future government spending will be less effective?
There was no causation: the two events were contemporary and this has led people to believe in seeing more than there was.
The bank you are referring to is Creditanstalt (CA for short), which had been the largest bank in the closing decades of the Hapsburg Empire.
During the 20’s CA, very much like US banks, started lending with complete abandon. One of CA’s chief customer was Steyr, a weapon manufacturer which has decided to expand into cars and trucks at the close of WWI.
Steyr encountered serious financial difficulties in the late 20’s, and in October 1929 defaulted on their debt.
The Austrian government, led by Johan Schober, was busy paying off war reparations and such had no resources to spare to bailout CA, which was forced to declare bankruptcy in early 1931.
CA was effectively nationalized until 1997 and continued to exist in various forms until 2008.
The Roaring 20’s had lot of similarities with the Asian Tigers of the 90’s, chiefly in the use of easy credit to stimulate exports: it’s often forgotten after WWI US exports to the rest of the world literally skyrocketed thanks the availability of cheap credit both to US exporters and foreign importers, chiefly European.
It had more to do with there being no Glass-Stegall.
Unfortunately Ben Bernanke studied the Great Depression and not the events leading up to 1929.
What did the bankers do before 1929?
They made bad loans and bundled them up into securities to sell them on.
As they could get these bad loans off their books, they could carry on making more and more loans.
Most of this lending was margin lending into the US stock market.
What did Glass-Steagall stop bankers doing?
Making bad loans and bundling them up into securities to sell them on.
When investment and retail banks are separate, the retail banks have to take responsibility for the loans they make as they stay on their books.
This also limits the amount of lending they can carry out.
What happened when Glass-Steagall was removed?
The bankers made bad loans (e.g. NINJA mortages) and bundled them up into securities to sell them on.
As they could get these bad loans off their books, they could carry on making more and more loans.
Most of this lending was mortgage lending into the US housing market.
1929 and 2008 – debt inflated asset bubbles leading to “Minsky Moments”
Cant remember the name had lots of m’s as I recall and yes there was/is a certain amount of factual basis to the position that it was in fact the trigger to and inevitable 1929 event.
Just like subprime in 08, 1929 was a when event.
The American depression that started in 1929 was a double barreled shotgun blast to the national economy.
The first barrel was the collapse of the stock market asset bubble (largely funded “on margin), compounded by a large amount of what would be considered fraud today such as insider trading/stock pools. This was amplified by the creation of highly leveraged or “geared” stock funds such as “Blue Ridge” and “Shenandoah” by “Golden Sacks,” which depended on credit. IMNSHO, much of this was driven by an attempt to “double down,” by the investors and banks after their horrendous losses generated by the collapse of the Florida land boom in the early 20s.
The U. S. economy had started to improve by 1933, and the markets were beginning to “clear,” when the international banking system collapsed, (the second barrel) starting with Creditanstalt in Austria. This was not entirely Creditanstalt’s “fault,” as they had been forced by the Austrian government to merge with another (insolvent) bank, in a rescue attempt (sound familiar?). At it’s heart, it appears this collapse was due to a huge leveraged/pyramided financial structure largely based on/around German War Reparations, which turned out to be essentially non-collectable at that time, even after two major American efforts to “extend and pretend” (Dawes Plan/1924 and Young Plan/1929). This “asset bubble” was amplified by high levels of fraud and corruption, For example “The Swedish Match King,” Kreuger ( suicide? 1932) This international banking collapse was disastrous for many U. S. banks, which had directly lent money to Germany, or in the case of the smaller banks held (directly and indirectly) German Bunds.
To better understand this incredible saga I suggest _Lords of Finance: The Bankers Who Broke the World_ by Liaquat Ahamed available from Amazon.
Thanks-I did have the crash of 29 and the bank failures of 32/33 in mind. I had thought that the loss of stock values was what drove the banks down and I see some other ideas now. I will be getting the Lords of Finance book and will check it out.
I have read Mr Ahamed’s book, The Lords of Finance and agree that it is both a great read and an education about the causes of the Great Depression. I can highly recommend it.
Germany’s success has relied on smaller banks geared to lending into business and industry.
Bigger banks like to concentrate lending into whatever bubble happens to be blowing at the time, usually real estate.
Exactly; but of course it is much easier to make big money in todays lethally distorted economy by speculating in bubbles than by investing in productive enterprise.
Draghi still represents Goldman Sachs, no surprise that he wants to kill the small banks and make the whole world one big gambling casino (owned by the bank that does God’s work) and make sure that all serfs have no alternative than participating in the madness.
Draghi wants to Walmart the banking system by killing off all competition. It’s the only way for them to gain market share. Look at what Walmart has done to American retailing and you will see the future result of his scheme. Once they kill off all competition, they are the only game in town, and then when they pull out it’s even worse. It’s history rhyming.
Thanks to all-That was the one I remembered. It had come to mind because of the current scary state of the Deutsche Bank. I just keep seeing parallels between 29, 08 (Lehman) and today. I may also be a bit crazy as I think yellen is pumping just to keep the markets afloat until after November 8th.
BTW-I read Folsom’s New Deal or Raw Deal. It is an excellent analysis of exactly how fdr kept the Depression going for political reasons.
As to the Glass Steagall Act-I do believe its removal is a lot of the reason for the way our banking system is teetering over a debt Grand Canyon today.
“(Draghi did not) mention the destructive side effects of the ECB’s negative interest rate policy (NIRP), which (sacrificed) millions of savers and retirees via their pension funds on the altar of rampant debt creation…”
“They buy me and sell me…it’s a game…sometime I’ll
break loose…” Carl Sandberg – “The People – Yes”
The biggest problem for the European banking system is that the prez is selected for ten years without recall, and that the latest one was Italian, after a German withdraw. That will be corrected the next time, but maybe too late.
the ECB president is irrelevant, do you really think policy depends on one guy or gal?
One person can never go against the international bankster syndicate. Some people think the first ECB president, Dutch Wim Duisenberg – who had quite different opinions than current mobsters like Mario – was murdered after Trichet took over his position; officially he just had an ‘accident’ of course …
Reality is that a big majority of the ECB members are ClubMed countries that favor inflationary policies, because that is what they are used to and how their economies function. All central banks have the same voting power in the ECB council, so by design the ECB will be a collection of money printing charlatans. Having agents from Goldman Sachs everywhere in the top hierarchy doesn’t help things either …
“Put simply, there’s just too much competition from the thousands of smaller banks that are crowding out the profits for the big banks.”
Exactly right. O’bomb’em’s promise to break up the TBTF banks if they were bailed out by taxpayers was an outright lie. As usual, the exact opposite has been proven to be true.
In short, the reason that foreign banks and investors were recapitalized was that if this were not done, the “New American Century” Empire of USD-controlled vassal states would have ceased to exist.
But after the impotent pleas from the little bumbling village idiot from Texas fell on deaf ears, the new, slick-talking actor from Chicago promised selfish, bone-ignorant Congressmen that if they would vote for a big big big bank bailout, he would break up the TBTF banks (whose failure would have caused a financial collapse of the “old”, post-Glass-Stegall-Act-repeal “economic system”).
And so the congress did, which, as has since been proven beyond any doubt, would completely change the US’s economic / financial system for the worse. That moment was in reality a coup d’etat for the TBTF banks.
The bank bailouts, the phony statistics and the recent phony rate hike (which was immediately accompanied by the increase in the IOER) indicate the Fed’s REAL goal — to prevent the TBTF banks from taking big losses and their Elite owners in the lifestyle to which they feel that they are entitled.
Even though the Fed lies like hell about how wonderful the economy is, they know that the crisis never ended. Absolutely every act the Fed has taken since that time proves this proposition.
In short, nothing else matters. As long as the TBTF banks remain in existence, “the economy” will some how, some way, some day, magically right itself. It is the ultimate “trickle down” economic model and is described as follows in the Fed’s one-page Bilble.
“First, there was only darkness. Then God said, ‘Let there be light.’ Then God said, ‘Let there be a firmament in the midst of the waters, and let it divide the waters from the waters.’ Then God said, ‘Let there be banks.’ Finally, God said, ‘Let there be man.”
THIS is the Fed’s fundamental “economic model” — TBTF banks first; humanity later. There is no complexity. Humanity’s ultimate purpose is to serve the TBTF banks; not the other way around. Before humanity can enter Heaven On Earth (Utopia), TBTF banks must control everything. Slowly but surely, as all of the TBTF banks’ enemies (which now include small banks) are destroyed, “we” are getting there.
Fed members know full well that the official inflation / employment statistics are pure B.S. and that inflation is in fact rampant and that low-paid people are borrowing and spending far more than they should.
In the past, under these circumstances, the Fed would raise interest rates WITHOUT raising the IOER, until borrowing and spending were damped down. But this cannot be done today. So some how, any way, the Fed has to “encourage” banks to raise the interest rates they charge for loans, as well as pay “investors”, while at the same time prevent the banks from moving their excess reserves (that they’ve been handed by the Fed) into the real economy. Again, the Fed’s twin moves attempt to do just that.
Regardless, the Fed-funded US military-security-industrial complex’s (MSIC) sole purpose is to enforce Fed policy domestically, and, globally, to literally force the rest of the world to continue to accept printed-out-of-thin-air USD in payment for REAL goods. (BTW, THIS — hegemony — is the REAL US “foreign policy”.)
There is no complexity to the REAL, “forward going” goal of the Fed. It is to do literally “whatever it takes”, including martial “law” and mass domestic incarceration, to prevent TBTF banks from failing and, therefore, maintain the Elite in the lifestyle to which they feel that they are entitled.
Of course how to conduct the interminable wars and prevent the bewildered herd from stampeding is a very complex one and requires a 24/7 propaganda machine, as well as a never-ending stream of gibberish from Yellen and the members of the FOMC. These well-trained actors and MSM propaganda are astronomically expensive, but all Janet’s not-so-invisible hand has to do is hold down the “0” key for longer and longer periods of time and all the Elite’s invoices magically get paid.
That’s the US’s new economic system in a nutshell, folks. Janet holds down the “0” key for longer and longer periods of time; the US’s MSIC literally forces the rest of the world to accept those digital USDs as payment for their REAL goods; any nation that does not comply either has its government replaced with one that is more compliant or is destroyed.
The Fed’s USD used to be on the gold standard. Now the fiat USD on the “drone standard”.
Mercenaries paid by fiat USD now replace draftees and there is very little MSM “coverage” of US-funded murders all over the globe. SO there are no coffins flying back to Main Street USA to get the bewildered herd stirred up about as far as perpetual war goes.
In short, the TBTF banks’ insulation is thick and the number of fiat USDs is infinite, so, unfortunately, the one only thing that will stop the US’s new, politically-unstoppable “whatever it takes” war-based economic system will be a nuclear strike delivered to Main Street USA by nations who have been victimized by it for literally decades.
a nuclear strike on Wall Street would be a good start and maybe enough to stop the unstoppable (assuming it also kills the royalty streams to Washington DC, the Clinton Foundation etc.).
Anyway, just like with the aging ‘republic’ some 1600 years ago, sooner or later the mercenaries will discover that they are paid with increasingly worthless fiat and change sides. Who knows, maybe they will chose the 70 virgins and their part in the loot from the latest US Middle-East franchise instead of US dollars.
The key for the large banks is they’re so well run. Take DB for instance, they nearly escaped being fined $14B and even so nobody was arrested and placed in prison on criminal charges.
That’s something not many small banks can claim.
From the recent rumblings about a govt bitcoin, it appears tptb are considering putting all transactional banks out of business, leaving the wall street banks to pillage and rape as super hedge funds. BOE started this with a study on the block chain. Sleazy Summers and the Odious Rogoff are pushing it with their cashless econ proposals. Our wealth will be trapped in a digital jail. Better stock pile gallon jugs of Tide.
I am stocking up on gold, silver, and lead.
Bookie, well said ……….especially that precious metal lead!
I compliment you on your handle-nice Ish is still remembered!
People forget that the Fed is really a quasi private corporation with a little input from the government. The folks that run the Fed are really employees of the founding banks and are fully aware of who signs their paycheck in the end.
There is something positive to be said for Draghi’s remarks.
Competition makes it harder for successful companies to power ahead. Increasing choices for customers dilutes the concentration by spreading the energy around, enabling the under-capitalised under funded under supported to survive. individual customers may be or feel better off dealing with a small bank, but one reason small banks stay small is that there is more supply than demand. Small banks overcome their disappointment at the lack of opportunity for growth by proclaiming the advantages of the smallness to customers. But without economy of scale the margins are slim which is why despite any superficial attractions small rarely translates into higher interest rates for savers or lower rates for borrowers. In the absence of serious competition, the big banks are then able to follow derisory suit
Small also survives, as it must remain solvent.
The mafiosi at the ECB, simply wishes the removal of the solvent, to protect the big insolvent.
There is no such thing as TBTF, simply a lack of political will, To do what must be done, and carefully manage the Failure/Consolidation of, Too Big.
Without injecting, taxpayer, or savers, fund’s, into it. Which may need some new pieces of law, to put To Big, into State managed bankruptcy and consolidation protection, where the only people guaranteed anything, are the depositors, who should be kept whole.
Competition is tough. No one likes it. But it brings out the best. At least that’s the hope.
are you joking??
Small banks cannot offer better rates because unlike the big banks they cannot make super-risky trades and makes loads of money, while being bailed out by the taxpayer if their deals go sour.
Most of the smaller banks have FAR better capital positions than the big gambling casino’s that Mario is representing. All the big banks are walking zombies, they should have failed in 2008 (or in 1987, 2001 already) and only a constant lowering of rates has kept them alive.
Of course the constant lowering of rates is adding more zombies to the club because profits are shrinking. That’s why Mario is working hard on eliminating small banks and eliminating cash, so he can use punishing savings rates like -5% and still allow the big banks to make money wile keeping official rates below zero. The only thing holding him back is the fact that there still is competition, once that disappears are freedom is lost and we are all debt serves for Goldman Sachs.
… debt serfs, probably ;-)
I would suggest that Mario Draghi sits atop the dunce cap of the head of the European Commission, but that would be a mistake. Instead, it appears that Draghi is the apex of that dunce cap.
I have only seen few individuals in such power act like complete imbeciles, and most were central banksters. Nothing good ever comes out of their mouths. And no good counter-idea goes unpunished. We are left with the babbling comments of such intellectual lightweights as Alan Greenspan, Ben Bernanke, Janet Yellen, and now the bigger fool, Mario Draghi.
I think every nation of Europe needs to have a movement to secede from the European Union. They need to turn that cesspool of stupidity into a museum before they become destroyed by their policies as forces from within and outside their borders act to collapse their broken system.