The threat to Europe’s banks

While the Euro Stoxx index has rallied 15% this year on the prospect of interest-rate cuts, eurozone banks have been notably absent from the festivities.

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Mario Draghi's rate cuts won't help banks
(Image credit: 2019 Getty Images)

Markets are rubbing their hands at the prospect of a "parting gift" from Mario Draghi, outgoing European Central Bank (ECB) president, says Tommy Stubbington in the Financial Times. Yet while the Euro Stoxx index has rallied 15% this year on the prospect of interest-rate cuts, eurozone banks have been "notably absent from the festivities".

Negative interest rates mean banks are "charged to hold their excess reserves at the central bank", says Tom Rees in The Daily Telegraph. Eurozone lenders "have paid out €21bn to the ECB since negative interest rates were introduced in 2014". Markets expect rates to go as low as -0.6%, suggesting an epic squeeze on banks' profitability. Goldman Sachs calculates that a 100-basis point cut could see a quarter of Europe's biggest banks become "loss-making or break-even".

The banks' woes run deeper than negative rates, saysChen Gong in The Brussels Times. Big layoffs this year at Deutsche Bank and Italy's UniCredit suggest that the "European banking industry has not fully recovered from the financial crisis". Where US authorities acted quickly to inject capital into banks, efforts to deleverage Europe's financial institutions were more haphazard.

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While US bank shares have long since rallied from their financial crisis lows, eurozone bank stocks are back near their nadir, notes Charles Gave on Gavekal Research. Even the Federal Reserve's recent rate cuts have not sparked a rally, which suggests that "central banks are out of ammunition".

The risk is that if eurozone banks get into more trouble, then they will reduce lending, creating "a vicious cycle" of sliding growth, says Chen."In the context of global trade war and economic slowdown, this vulnerability may eventually evolve into a trigger for a new global economic crisis."

Alex Rankine
Markets editor

Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019. 

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere. 

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful. 

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.

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