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.

Mario Draghi's rate cuts won't help banks

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".

Advertisement - Article continues below

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.

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."




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Boris Johnson’s big Brexit plan

The prime minister needs to get Brexit done, and get the economy growing – particularly for first-time Tory voters. Can he manage all that while negot…
15 Jun 2020
European stockmarkets

European assets bounce as the eurozone's economy turns upwards

Both the euro and European stocks have rallied strongly in the last few days.
12 Jun 2020
EU Economy

Margrethe Vestager: a symbol of all that’s wrong with the EU

Margrethe Vestager, the EU’s competition commissioner, wields enormous power over industry, and abuses it, says Matthew Lynn.
7 Jun 2020

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020