worth a read published over the w/e
"It's not just Deutsche. European banking is utterly broken"
Jeremy Warner
A little while back I somewhat unwisely penned a column declaring the financial crisis essentially over. All I meant by this was that with the return of full employment and rising living standards, most of the economic wounds of the crisis had healed, at least in the US and the UK.
Yet as is evident from the events of the last week, the banking crisis itself is far from over.
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Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it's not the same crisis; in large measure, it is completely different.
Today's mayhem is not so much the result of reckless bankers and people asleep at the wheel of regulation, but rather of the public policy response to the last crisis itself - that is to say, regulatory overreach and central bank money printing.
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All eyes are naturally focused on the specific problems of Deutsche Bank, but Deutsche is in truth no more than the canary in the coal mine.
As Tidjane Thiam, chief executive of Credit Suisse, observed last week, as an entire sector, European banks are still "not really investable". Much the same disease as afflicts Continental banks also applies to British counterparts, including Royal Bank of Scotland, Barclays and even Lloyds.
All are fast being enveloped by a perfect storm of negatives, and this time around, it is substantially the policymakers and law enforcers who are to blame.
There are essentially four factors at work here.
Tidjane Thiam, chief executive of Credit Suisse, observed last week that, as an entire sector, European banks are still "not really investable".
First, it's virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years. In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears.
Much the same thing has happened to the once lucrative returns of investment banking. Even Goldman Sachs has been forced to admit that it is struggling to cover its cost of capital.
Second is ever-tougher international capital requirements, the latest instalment of which is dubbed Basel IV. The renewed crackdown is understandable, given what occurred nine years ago, but also ill-conceived and discriminatory, unfairly penalising European banks against their American counterparts.
The technical details need not concern us too much here, suffice it to say that in order to stop banks gaming the system, regulators are attempting to impose a so-called "output floor", tightly limiting the scope for easier capital requirements on risk weighted assets. US banks won't be nearly as badly hit by the measure as their European counterparts, which is no doubt why their regulators are gunning so hard for it.
Third comes the apparently never ending misery of misconduct fines, which for the US seem to have become just another way of further taxing the banks, particularly the European ones, routinely threatened as they are with removal of their dollar clearing licences should they try to resist. Nine years after the event, there is still no let up. It's a classic case of justice delayed being justice denied.
Typically, banks to settle for around half the amount initially demanded, as now seems likely with Deutsche Bank, but even so, the fines seem to be assessed almost wholly on ability to pay rather than the extent of the misconduct itself.
This renders raising more capital from investors a non starter. Why put up extra capital when you know it will just get snaffled by the US Department of Justice?
The political posturing involved is quite breathtaking. The Department of Justice is hoping to secure a giant omnibus settlement involving Deutsche, Credit Suisse and Barclays all rolled into one, timed for announcement just ahead of the presidential election.
It's Royal Bank of Scotland's turn next - not good given that its exposure to the sub-prime debacle was even larger than Deutsche Bank's.
On top of all this comes the challenge of fintech, which is threatening to eat the incumbents' lunch.
Despite the parallels, Deutsche is not Lehman's in redux. If necessary, Angela Merkel will bail the bank out, politically embarrassing though it will be for her. Whatever the cost, Germany is more than solvent enough to take the hit. Unlike previous legs in Europe's interminable banking crisis, there is no risk of fiscal contagion.
What all this will do, however, is cause banks further to contract their balance sheets, perpetuating the wider economic impact of the crisis. It all goes to show that there is no mess quite so bad that government intervention to correct it won't make it even worse."
The Sunday Telegraph. London
