Monday, March 8, 2021

Tag: ECB Wants to Weed Out Smaller Banks to Cut Competition

ECB Wants to Weed Out Smaller Banks to Cut Competition


by Don Quijones, Wolf Street:

Europe needs “brave banks” willing to conquer new territory.

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{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in the first half of 2017, compared to 19{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} 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{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} 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{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} 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.

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