Features

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.

960-Draghi-634

Mario Draghi's rate cuts won't help banks

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.

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."

Recommended

The Information Age is about to get interesting
Economy

The Information Age is about to get interesting

The IT revolution has been around for a while now, says Merryn Somerset Webb. But we're just getting to the good bit.
24 Sep 2021
I wish I knew what contagion was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what contagion was, but I’m too embarrassed to ask

Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
21 Sep 2021
Warsaw and Stockholm: the unexpected new threats to the City of London
UK stockmarkets

Warsaw and Stockholm: the unexpected new threats to the City of London

London has seen off challenges from Frankfurt and Paris, but two other booming financial centres are a bigger threat, says Matthew Lynn.
19 Sep 2021
The charts that matter: more pain for goldbugs
Economy

The charts that matter: more pain for goldbugs

Gold investors saw more disappointment this week as the yellow metal took a tumble. Here’s what’s happened to the charts that matter most to the globa…
18 Sep 2021

Most Popular

A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
What really causes inflation? Here’s what prices since 1970 tell us
Inflation

What really causes inflation? Here’s what prices since 1970 tell us

As UK inflation hits 3.2%, Dominic Frisby compares the cost of living 50 years ago with that of today, and explains how debt drives prices higher.
15 Sep 2021