Europe needs “brave banks” willing to conquer new territory.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The biggest financial problem in Europe these days is that it is “over-banked,” according to Daniele Nouy, Chair of the ECB’s Supervisory Board, and thus in charge of the Single Supervisory Mechanism, which regulates the largest 130 European banks.
In a speech bizarrely titled “Too Much of a Good Thing: The Need for Consolidation in the European Banking Sector,” Nouy blamed fierce competition for squeezing profits for many of Europe’s banks while steadfastly ignoring the much larger role in the profit squeeze played by the ECB’s negative-interest-rate policy. ECB President Mario Draghi agrees.
The profits of the largest 10 European banks rose by only 5% in the first half of 2017, compared to 19% for the US banks, which benefited from higher interest rates, stronger capital markets, better capitalization, and larger market shares, according to a new report by Ernst and Young.
In its latest annual health check of European banks, Bain Capital found that 31 institutions, or 28% of the 111 financial institutions they assessed, are in the “high-risk” quadrant. Location seemed to be a far more important factor than size.
- Banks in Italy, Greece, Portugal and Spain have become “a breed apart in continued distress,” the report said, adding: “Every single bank that has failed in the past decade and for which there are financial statements available…fell into this quadrant before their demise.”
- Scandinavian, Belgian, and Dutch banks figured prominently among the 38% of the banks that attained the strongest position, outperforming on virtually all financial indicators.
By contrast, many German and UK banks fell into the second category, that of “weaker business model.” In fact, virtually all the large German names fit into this category as their profitability and efficiency languish at levels comparable with their Greek counterparts. They include Deutsche Bank, which in the midst of its third revamp in so many years, just reported its worst revenues in three and a half years.
Deutsche Bank is far from alone. The dismal reality is that nine long years after the global financial crisis began, many systemic European banks pose as big a risk to the financial system, if not bigger, as they did back then. The only major difference is that now they’re hooked on Draghi’s myriad monetary welfare schemes (LTRO, TLTRO I and II…), which have managed to keep them afloat even as the ECB’s monetary policy puts a massive squeeze on their lending margins by driving interest rates to unfathomably low levels.
But rather than raising interest rates — a scary thought given how major Eurozone economies like Italy and Spain have come to depend on QE to keep servicing their public debt — the ECB plans to reduce competition in the banking sector by weeding out smaller banks. It’s a process that is already well under way, as Nouy explained in her speech:
Since 2008, the number of banks in the euro area has declined by about 20%, to around 5,000. And the number of bank employees has fallen by about 300,000, to 1.9 million. Total assets of the euro area banking sector peaked in 2012 at about 340% of GDP. Since then, they have fallen back to about 280% of GDP.
But this is not about shrinking the size of the banking sector; it’s about shrinking the number of players within it and in the process creating trans-European banking giants. To achieve that goal, all Europe needs are “brave banks” that are willing to conquer new territory:
Cross-border mergers would do more than just help the banking sector to shrink. They would also deepen integration. And this would take us closer to our goal of a truly European banking sector.
Cranking up the consolidation and concentration of Europe’s banking industry was one of the crowning goals of Europe’s banking union, as we warned over three years ago. But so far it’s been a dismal failure, for three main reasons.
First, 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 small businesses — are currently still under the supervision of national regulators. And many countries, in particular Germany, are determined that it should stay that way.
Second, this is not 2006 — most banks don’t have excess money to splash out on cross-border acquisitions.
And third, even if they could, very few banks want to buy or merge with other banks, since they have no idea just how serious their rival institutions’ problems are. As the Bankia example amply showed, merging one insolvent institution with another (or others) tends to compound their problems.
Nevertheless, Nouy’s Supervisory Board is determined to breath life into a new generation of trans-European banks. And if regular cross-border acquisitions don’t pan out, there are always bank failures as a mechanism for consolidation. As the ultimate decider of which struggling banks get to live or die and which lucky competitor gets to pick up the pieces afterwards, without taking on the otherwise unknown risks, the Supervisory Board is certainly in an ideal position to drive this type of consolidation forward. By Don Quijones.
It just doesn’t let up with these banks. Read… The Next Spanish Bank Teeters, at Worst Possible Time
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Gosh, these poor banks. You know, we should really thank them for doing god’s work.
And of course that’s ignoring the fact suchbig international banks would negatively affect the economy of several countries at once if they crashed.
One Bank to rule them all, One bank to find them; One bank to bring them all and in the darkness bind them.
So on one hand Facebook and Google get in legal trouble in Europe because they evad taxes and are monopolies yet in the other they want International Mega Banks?
No wonder the Eurozone is leaking by the seams…
You can’t be anti monopoly in the tech sector and be pro monopoly in the bank sector…
Unfortunately in EU it is not only possible but actually commendable,remember Draghi said “whatever it takes”.
In the end, there can be only one.
The word for ‘bank’ in the Black Tongue is ‘bank’. That should tell you something.
In the land of Debt where the shadows lie.
Eliminating diversity in an biological environment is a recipe for disaster when some bug or bacteria gets into an area.
Analogously, I can’t see how concentrating the banking into fewer hands will help create stability.
Fractional Reserve lending is inherently unstable as you can make loans upon loans. All it does is artificially suppress interest rates by loaning out “make believe, counterfeited” capital.
If you think of if as an engineering “system”, the fractional reserve landing rate provides the “gain” to a system.
Usually the higher the gain in a system the more unstable and susceptible to oscillations it becomes. We already know that capital rations of 1/30 from the great financial crisis in 2008 is dangerous. We only have maybe 1/10 today in a regulated environment but it still creates instability.
All the bank panics while we were on the Gold standard, and the reason for push to adopt the FED, were all caused by the inherent “gain” in the economy presented with Fractional Reserve Lending. It becomes vary risky to lend out money that both you and lender believe you have access to. It is like have a “joint banking account” with your wife, only to find there is no money there since the your wife raided the account and bought something you both did not discuss.
Now imagine you have a joint saving account with 10 people. That is what you get with fractional reserve lending. If you have a reserve ratio of 10% then 10 people are participating in the joint bank account.
No wonder they wanted a Central Bank as a back stop in case somebody overspent the account and there was really no money there.
The gold system made it inherently more unstable since it caused a slight deflation due to the “fixed” nature of the money supply. Deflation for borrowers is murder since not only must they “swim” against the interest burden but in addition they have “swim” against the effects of deflation. Today’s FED greatly reduced the need for their own main purpose (ie. dealing with bank runs as lender of last resort) because they actively expand the money supply creating inflation, which makes it easy for borrows to pay back their loans in cheaper dollars. At least, they no longer have to “swim” against the tide of the natural deflation inherent in modern innovating economy. The US Government can affect the money supply growth (monetary inflation) just by issuing new debt too since that trades exactly as money in the market. Government debt or currency trade the same so Government debt is as good as currency.
Fraction reserve lending is possibly the root of all evil.
It is no wonder the bankers are vilified. Their basic business model is fraud and deception and it is entirely legal.
Flying Monkey,
Isn’t the fractional reserve percentage irrelevant?
My understanding is that banks can lend and create money to their hearts’ content. Then afterwards, they can meet the reserve percentage by either borrowing from other banks or from the Fed overnight. So in essence, there is no limiting reserve.
Here’s an example. Bank of Imbeciles has $100m in reserves and has lent out $1B. Now they want to lend out $200m. They are completely free to do so. The money is created from thin air and lent out. Overnight, they borrow $20m from another bank or from the Fed. Presto, they’ve met the reserve requirement.
Someone please correct me if this is wrong.
Control of taxcattle. ECB utter total dictatorship plan.
EU going toward total collapse….power blind EU ECB never care one bit of the cattle, this will backfire.
Once the herd gets enough frustrated…it starts moving.
Roman empire syndrome….has scored yet another success.
The European sheeple voted for this. They purely and simply deserve everything that’s coming to them.
Does the Euro zone banking industry, need much more consolidation.
YES
Does it need politically (EU DICTATORSHIP FROM BRUSSELS ) motivated and driven, cross border consolidation, to meet ECB EC demands.
MOST DEFIANTLY NOT.
If unions are made with political objectives at the fore. Financial disasters, that will be foisted on the EU taxpayers, will follow. As trans state bank’s will need trans state funded bail outs. Probably part of the idea in brussels which is forever seeking ways to increase its power web’s.
Hi Don,
Is it working-has it worked in Spain the consolidation of the banks?
Yesterday it was mentioned its gone from 55 banks down to 11 banks in Spain?
Regards
Steve
Hi Steve,
You’re right, in Spain it’s working a treat. Many experts predict that in the next five or so years those 11 banks will be pared down to three or four (Santander, BBVA, Caixabank, and Bankia). In other words, a perfect oligopoly, with all the trappings (fewer choices, little motivation to compete, price fixing, massive barriers to entry…). Oh, and they’ll probably all be too big to fail :-[
Regards,
DQ
Hi DQ,
What about the Bank of Catalonia after Sunday lol?
A good point you make is the Barrier to entry, as an EU country surely an EU bank from another country can trade in Spain?
Regards
Steve
Possibly in Spain your predictions of oligopoly may come true. Iyt is a very crony corrupt place.
Elsewhere not so.
We went through similar in our industry 20 plus years ago wehad far to many little regional banks and to many big ones.
When it gets down to about half a dozen it will stabilise and there will always be competition particularly in Europe as somebody will always see an opportunity to enter and upset the apple cart.
Frequently with the exit strategy of getting brought up by one of the majors.
Just like the garbage business.
I’m sure that central bankers throughout the world have all of our best interests at heart.
Just look at the angelic Jamie Dimon for example …….
He’s got “Presidential Cufflinks”
While the gold standard existed at least money was worth something. Nowadays there is tons of “imaginary” money that only exists digitally and on paper. Is also a fact that save for the great depression, that’s let’s remind you all happened because of imaginary money called stock bonds, all the greatest economic crisis have happened after the gold standard was abandoned.
So yes the gold standard was a stability factor in the economy, even if it wasn’t the only one.
Be your own central bank, and you’ll be better positioned to ride out the coming collapse of the central bankers’ financial house of cards.
https://dollarcollapse.com/precious-metals/just-be-your-own-central-bank/
If I could afford to have that much gold, I wouldn’t be so insistent on wanting the gold standard back in the first place. The “brick inflation” that means houses and building are over valued; has also made owning “bricks” as in owning buildings a quite more risky than it used to be just a few decades ago.
There is just no ‘reasonable safe’ investment left, While our grandfathers had plenty of those.
Thank you neoliberalism!
I keep hearing that we left the gold standard (in some respects this is true), yet according to a 2016 artice from Forbes half of the countries have more than 50% of all foreign reserves in gold. This doesn’t include the IMF, which is really in third place with over 2000 metric tons of the stuff (I don’t know their reserve statistics). For the financial leaders who snub the stuff, it’s amazing how much we claim to have in storage.
US Gov: get your bonds here!
Citizen: Buy can’t you finance this out of thin air? What about gold?
US Gov: pay no attention to gold, that is archaic. It’s all about the full faith and credit about our scheme, uh I mean economic activity.
US Gov: Get your bonds here!
Citizen: But your money is worth far less than it was before, what about that economic activity you were talking about?
US Gov: We own over 8000 metric tonnes of gold. Of course it is worth something. Why do you think we keep it?
Citizen: But you said earlier…….
US Gov: Don’t worry about what I said earlier, that was archaic thinking.
Citizen: Since you said it doesn’t have a basis before, is there a chance that we can verify you actually have it?
US Gov: You worry to much. Counting and verifying- do you have any more archaic thoughts? Have a little bit of faith, the blind kind of course. It is a confusing world out there, and I don’t want to add any confusion to it.
Citizen:
Consolidation of the banking system enables more effective collusion and manipulation of the financial sector, and facilitates turning former sovereign countries into bankster looting colonies.
Is basically building glass banks instead of glass houses.
How would Europe benefit if Deutsche Bank, one of the most over leveraged banks in the world, were to acquire smaller banks? These days, the big banks are not only useless, but detrimental to the wider economy. “Consolidating” the small banks, that actually serve the community, into these behemoths would serve no function but to limit the choices of consumers and businesses. Just like the Fed in the U.S., the European Central Bank is the enabler of financialization and the siphoning of economic wealth into the hands of banks that no longer serve any useful purpose.
Less adaptability/diversity/choice, closer to monopolistic control.
Enabled by the ECB & the European Union.
What’s new?
Seems like a lot is hinging on tomorrow’s referendum in Catalonia. Could this finally be the event that causes the ECB’s extend-and-pretend to run out of road?
http://www.zerohedge.com/news/2017-09-30/why-madrid-will-never-let-go-catalonia-closer-eurozone-spain