Authored by Philipp Bagus via The Mises Institute,
While the euro crisis seems far away as all Eurozone countries ran government deficits below 3 percent of GDP, there is one problem for the euro that quietly keeps growing: the unresolved banking crisis. And this is not a small problem.
The Eurosystems´and euro banks´ balance sheets totaled €30 trillion in January 2018, that is about 291 percent of GDP.
European banks are in trouble for several reasons.
First, banking regulation has become tighter after the financial crisis. As a consequence regulatory and compliance costs have rise substantially. Today banks have to fulfill demands by national authorities, the European Banking Authority, the Single Supervisory Mechanism, the European Securities and Markets Authority and the national central banks. Being at a staggering 4% of total revenue currently, compliance costs are expected to rise to 10% of total revenue until 2022.
Second, there are risks hidden in banks´ balance sheets. That there is something fishy in European banks´assets can quickly be detected when comparing banks market capitalization with their book value. Most European banks have price-to-book ratios below 1. German Commerzbank´s price-to-book ratio stands at 0.49, Deutsche Bank´s is at 0.36, Italian UniCredit´s at 0.23, Greek Piraeus Bank at 0.14, and Greek Alpha Bank at 0.34.
With a price-to-book ratio below 1, buying a bank at the current prices and liquidating its assets at book value, an investor could make profits. Why are investors not doing that? Simply, because they do not believe in the book value of the banks´assets. Assets are too optimistically valued in the eyes of market participants. Considering that the equity ratio (equity divided by balance sheet total) of the Euro banking sector is at only 8.3%, a down valuation of assets could quickly evaporate equity.
Third, low interest rates have contributed to increasing asset prices. Stocks and bond prices have increased due to the monetary policy of the ECB, thereby leading to accounting profits for banks. Monetary policy has, thereby, artificially propped up banking profits during the last years.
Fourth, according to the ECB non-performing loans (NPLs), i.e. loans where borrowers have fallen behind in their payments, amount to €759 bn., that is 30% of the banks´ equity.
Fifth, more trouble for banks lies ahead. Due to artificially low interest rates, insolvency rates have fallen. In Germany in 2003, 39,470 companies (1.36% of existing companies) became insolvent. By 2017 insolvencies had fallen to 20,200 companies (0.62%).
Insolvency Rate in Germany 2003-2017, by %
Source: Creditreform.de
Companies that otherwise would have had to close, can survive due to interest rates close to zero. Their survival is not without cost as they suck up resources that could be used in other projects. Every year of the ECB´s zero interest rate policy 10,000s of bankruptcies are postponed adding to a growing stock of zombie companies. The zombie companies contribute to the anemic growth because they mal use resources that could be use more productively in other lines of production. Once interest rates increase rapidly these zombie companies will come to the roost and insolvency rates will return to more normal levels leading to problems for banks.
Sixth, lower interest rates have posed severe problems to banks´net interest margin. The passive, the transformation and the credit margin of banks have fallen. The passive margin results from investing deposits of bank clients in the overnight interbank market. Banks could earn traditionally a margin this way but not in a world of negative interbank rates. The transformation margin results from maturity transformation, when a bank borrows short-term from a client and lends long-term to another client. With a flattened yield curve, this transformation yields less than it normally would. Borrowing at 0% in order to lend long term at 0% is not profitable. Moreover, when banks lend long term at very low interest rates and short-term rates start to increase, margins fall further.
The credit margin results from the risk of lending. Banks try to compensate the falling passive and transformation margin by assuming higher credit risks. The competition of banks in this field drives down the credit margin as well. Thus the zero interest rate policy of the ECB has cannibalized traditional bank profitability.
Seventh, banks in the Eurozone are still connected closely to their government. As of January 2018, Eurozone banks held €3.536 bn. Government debt on their books which amounts to 13% of their balance sheet total. When in the next recession, the sovereign debt crisis looms again banks can expect losses on their sovereign debt portfolio.
When interest rates increase in the future banks will be confronted with several difficulties.
First, non-performing loans will increase and zombie companies will go bust.
Second, banks' long term low interest rate loans will become more difficult to refinance profitably.
Third, asset prices will fall leading to losses. Government may get into trouble.
As a result of these losses, banks will be forced to restrict credits as their equity shrinks. Ironically, the ECB´s zero interest rate policy designed to promote credit expansion will finally lead to a credit contraction. There will be a severe recession and a fall in the money supply. The crisis will not only endanger the banking system but the euro as such, because troubled Eurozone government will try to recapitalize their banks through a monetization of newly issued debts.
Comments
Deutsche Bank stuffed full of toxic derivative shit. Unleash the tsunami and blame the Germans. Works every time and no doubt STASI "Erika" will be more than happy to go along with her anglozionazis plan.
LOL. Sounds like if the EU would just deregulate the banks they would have no problems at all. That sure worked out wonderfully in the ussa.
In reply to Deutsche Bank stuffed full… by Fireman
The inflation adjusted economic growth of every country in the world in the 21st century:
http://thesoundingline.com/ranking-worlds-economic-growth-21st-century-…
The problem with the EU banks is that the EU has been the worst performing economy in the world.
In reply to LOL by Pearson365
It is no secret that the Europeans love their bureaucracy. For example the EU has 1200 rules on the importation of bananas! 10% compliance cost is insane. I would agree that total deregulation is going to the other extreme, but it is fair to say that reducing regulations by 50% is a good thing for the economy.
In reply to LOL by Pearson365
Zactly what I thought when I saw the BS about compliance costs. Clearly written by a banker not being able to sweep all the money out of the bank every night and play the stock market.
As long as banks pool money for investments outside the community they are just pass through agencies with no real connection to the area and people the serve. They become dependent upon fees instead of income generated and paid back to the investors as interest and the whole system becomes a sham.
They did it to themselves.
In reply to LOL by Pearson365
You only need to list ONE reason EU banks are in trouble. Debt-based fiat money system run by criminals.
But don't worry, it's only the banks that are in trouble. The Banksters will be fine.
In reply to Deutsche Bank stuffed full… by Fireman
Yes, always. And this time, it will be sky-high interest and inflation when all that expanded money supply hits the wall in the next crisis. The Bankers will always be fine. They will call for the cashless society, we will get bar-coded and locked in the system and it will continue.
In reply to You only need to list ONE… by bowie28
is the usa any different? 8) PENSIONS
DA FED MON! criminals...
In reply to You only need to list ONE… by bowie28
The break up of the EU is almost assured over time. A German/France/Italy superstate may eventually emerge in longer term with some dependents around the perifery. Deutche in the meantime should learn the lesson of VW (or UK transatlantic crossovers of the 80's +90's) - "you're not welcome here" and the hit peices will continue until owned or gone.
In reply to Deutsche Bank stuffed full… by Fireman
wrong....because Washington DC is backing only Wall Street Banks. Europeans don't reward the richest, for be rich
In reply to Deutsche Bank stuffed full… by Fireman
Always wondered how much US FED money went to the EU banks. (Read planes full of pallets of cash). You can't tell if the lack of this is a problem because you never really knew how much they got or if they still are.
US banking is at best a criminal cartel. Therein lies the problem.
In reply to Deutsche Bank stuffed full… by Fireman
Points 1 and 3 are not unique to European Banks, the same thing is going on in U.S. Banks as well.
In reply to Deutsche Bank stuffed full… by Fireman
If market capitalization were much higher than assets at book value, you would have said European banks are currently too expensive. Because it is the other way around, even under heavy regulation, you say nobody believes its books.
I don't know what the current situation is, but don't make people believe US banks are any different than European banks.
There is one big difference. In 2009 the US banks pushed all their bad loans to Fannie and Freddie. The European banks still have all the bad loans on their books. In that regard, the US banks are much stronger.
In reply to If market capitalization… by MoonSun
and the taxpayer is weaker. Boy I feel good about rescuing the richest
In reply to There is one big difference… by Singelguy
Don't worry you won't pay for it. But maybe your kids or grandkids will.
In reply to and the taxpayer is weaker… by venturen
Nope. Bank doom porn doesn't cut it.
There aint no shit and there aint no fan.
Some commentators just don't get it.
We've had more than a decade of this waaah waaah and they aint broke yet.
Let me know when the charts change 25% - and I'll call it a mild rise or fall.
A 3% change in any one chart or index is not a crash OK?
Sumfink wong wid dat "map"...
its a very rude map with a giant penis north of poland...
In reply to Sumfink wong wid dat "map"... by Byte Me
>a giant penis North of Poland
Dude, that's Norway.
In reply to its a very rude map with a… by zob2020
nope, Baltic States (or we're seeing different cocks... :)
In reply to >a giant penis North of… by RudeDog2
You must be one of our well educated ex-colonial 'Amerikans', with such a well imbued knowledge of geography..
For other 'passing tourists' who are having map difficulties (but have a geographical IQ superiour to the CNN graphics dept ) allow me to bring some KY and clarify penetrative "inconsistencies".
The big dong to the north of the map is in actual fact the newly incorporated Caliphate of Swedenistan. This actually marks a first for Europe in transitioning a Christian Monarchy directly over to an Islamic Terror Entity.
The small dildo like object to the south of "New Sweden" is in fact the fine country of Denemark (their preferred spelling)
NEITHER OF THESE LOCATIONS USE THE FUCKING EURO...
*
The North Sea now has new exploration opportunities - especially in the Carboniferous strata and other declines now available since MOST of the United Kingdom has now relocated to the (oil rich) environs of The Falklands.
Don't tell britbob.
*
But 'seriously' -- Northern Ireland gets "attached" to Eire?
Good luck there...
In reply to >a giant penis North of… by RudeDog2
Young Padawan; There is no money.
One of the presuppositions of life is there is a thing called money. Can you find it on the periodic table? Do you think that is a science you think you know? Can you give me any evidence of "money"? What is "money"?
A Pink Floyd ballad?
Can I perform a test on something called money and understand it's properties? Shit, we know more about the fucking stars in galaxies far far away than what we know about "money".
Is it the cotton fibre content of a dollar bill? or the plasticity of a Euro? Is it physical paper or binary data? Does money tell you it is money or is it stamped with an impramatur and a valuation on order in series?
Money is a re-presentation of something, but it is not tangible. If money is intangible like the soul, who can judge it's worth? Money. Monkey... Value, wealth... whatever.
Show me something and give me evidence that there is a phenomon that exists called money. And you can't fucking do it. If Gold is an element, Silver, platinum, iridium, what about helium? Oxygen? Neon? These are not money they are commodities.
There is no money. There's only excuses.
...and what a better, safer, affordable place the world would be if people only realised this and acted to shut down the existing banking cartels.
Government-issued, debt-free cash - in a tangible form - would cure many of the worlds ills.
When I consider how much of all the 'money' I've ever earned has gone to the pockets of those that don't deserve it, it makes me weep.
In reply to Young Padawan; There is no… by Golden Showers
Because it makes Trumptards feel better when it is not them. Yet!
Author forgets the <ctrl>p trick.
Cmon, the real reason for these banks to be so fucked up is they are led by perverted panty-waist faggots who are sexually depraved and deprived, thus affecting their judgment.
germany's landesbanks used to make money on home mortgage lending.
from here: https://www.statista.com/statistics/615037/mortgage-interest-rate-europ…
german and french mortgage rates are around +1.7%, compared to the ECB's MRO/LTRO rates of zero and MINUS 0.4% since March 2016 on its deposit facility.
that makes for a margin of around 200 basis points above ECB rates - LIBOR rates are a lot higher than ECB rates.
here is some stuff that shows France and Germany housing stock is between 30-40% rented, with around one quarter of the entire housing stock secured by a mortgage.
interestingly, half of italy's houses are mortgage free, compared to just over 25% in france and germany.
looks like there is a massive opportunity to treat italian houses as atm's to boost the italian economy via consumption.
http://ec.europa.eu/eurostat/statistics-explained/images/e/e6/Distribut…
start by looking at home first. american banks are bankrupt and have been bankrupt for 38 years since the savings and loans and what followed.
But it is easier to bash the road kill of the day.
seems as though russia comes out on top! resource rich, gold reserves, and sound world government policies.
budget balanced to. yet they are the worlds bad guys. huh, maybe a threat to the "chaos created fiat" monsters called Moar War-yeah...
In reply to start by looking at home… by Davidduke2000
in what reality based world would NPLs be a problem for banks? this is the new eCONoME, earnings don't matter, dodgy asset books don't matter.
You guys are sooo pessimistic. Our .gov friends had an excellent idea back in 2008-2010: strengthen the balance sheets with super reliable and A-grade government bonds (rated by top-notch .gov institutions), including bonds of PIGS. Don't worry about a thing: PIGS will always pay back debts and they'll never go over the 3% deficit rate mandated by ECB (after all, have they ever broken their word before?). All be just fine and dandy... Have some trust in our fine institutions such as the ECB....
(/sarc, for my own safety)
+1 there is no market, there is only the ecb.
In reply to You guys are sooo… by zvzzt
>Open a bank
>Immediately get a license to print 10x the money you started with
>Pay you & your buddies huge bonuses for a successful year
>Cry to .gov about "lack of liquidity," ask for "recapitalization"
I thought the approved recapitalization plan was bail-in? Has that been given up? I think the ECB expand the Mini-BoT idea to banks. Would allow NPL to be written off slowly.
The Euro-zone faces a slew of problems but in my eyes, two of the most pressing are that Italy is insolvent and Spain is coming apart with Catalan separatists defying Spanish Prime Minister Mariano Rajoy. The article below explores theses issues and argues all is not well.
http://Euro-zone Problems, Italy Spain And Bad Debt Galore.html
Maybe if bank owners and CEOs didn't siphon hundreds of millions of dollars or euros in profits out of the system, the banks would be more sound. How many mortgage payers does it take to salary a CEO? I keep hearing some banks made "record profits". OK, so where did it go? Certainly didn't stay in the banks. These wanks make millions while depositors are hit for bail-ins. Bullshit. Take all your money out of the bank. Your money is not safe in the bank.
because they aren't HQ'd on Wall Street....with a central bank set to rewards the richest
Maybe because they aren't in any trouble at all. Hell, they've been operating like this for the past two decades and nothing has happened. What's to say they can't just keep marching on like they are?
As long as the ECB will keep funding them, and the sheeple will keep head-up-ass and carry on, what will change things?
In reply to because they aren't HQ'd on… by venturen
I guess that is what they get for adopting the American model of banking.
Actually America adopted the European banking ways. In 1913.
1) He would grant Patterson and his associates a charter which would name them "The Bank of England," and
2) This bank shall have the "sole and exclusive right" to issue notes to the fullest extent of its capital.
The people were having a problem with their gold and silver coins of which the bankers quickly came to the rescue. The solution is aptly described by Professor Carroll Quigley in his book, Tragedy and Hope:
The King literally granted the Bank of England the legal right to print all the money that would be used in commerce by the people and the government. In other words the Bank of England became the sole money source of any currency that was used in English commerce by either the people or the government. If they needed more money, they simply printed it. It is said that by 1698 British government owed 16 X 10 to the 6 power pounds sterling to the Bank of England. Keep in mind this was only 4 years.
In reply to I guess that is what they… by Chief Joesph
A zero percent interest rate simply means that the present debt based system has failed. It has become incapable of pricing assets accurately enough so that the economy can function. Losers win and winners lose until their is no one remaining to keep the show going. The idea is to consume existing assets until there is nothing remaining. That's called monetization.
The Global Financial system is going to have one big headache and for some time and Bail Ins are going to be what CB's and Gov'ts are going to insist on and Depositors are going to take a huge haircut and Bond and Equity holders kiss their investments good buy.