Let Dar­win­ism de­cide fate of ail­ing banks

The Pak Banker - - OPINION - Mark Gil­bert

EURO­PEAN reg­u­la­tors are ty­ing them­selves into knots rewrit­ing the rules for the fi­nan­cial sys­tem. Specif­i­cally, they want to en­sure they won't have to use tax­pay­ers' money to buy lifeboats if a re­newed fi­nan­cial cri­sis threat­ens to tor­pedo the re­gion's banks. One op­tion that doesn't seem to be on the ta­ble, though, is to sim­ply stand aside, let nat­u­ral se­lec­tion run its course and al­low ail­ing banks to go bust. In­vestors are in­creas­ingly con­cerned about the vi­a­bil­ity of Euro­pean banks. Their prof­itabil­ity has fallen as neg­a­tive in­ter­est rates at the Euro­pean Cen­tral Bank have curbed what they can charge their cus­tomers for money. Many are sad­dled with loans that aren't be­ing paid -- Ital­ian banks alone have 200 bil­lion euros ($222 bil­lion) worth of non-per­form­ing loans -- and their stock prices are get­ting trashed, which puts bal­ance sheets un­der in­creased pres­sure. Since their July peak, Euro­pean bank stocks have un­der­per­formed the broader Stoxx Europe 600 in­dex by more than 16 per­cent:

Ev­ery sin­gle one of the 47 mem­bers of that bank in­dex is down by at least 7 per­cent. And within that broad move­ment are some truly spec­tac­u­lar in­di­vid­ual de­clines: Af­ter los­ing more than half its value in the past year, Deutsche Bank's mar­ket cap­i­tal­iza­tion is 22 bil­lion euros. Here's what hap­pened in the past six months to the price of Deutsche Bank's five-year credit-de­fault swap, which ba­si­cally tells you the cost of buy­ing in­sur­ance against the bank fail­ing to pay its debts: The rout be­gan ear­lier this month when Si­mon Adam­son, an an­a­lyst at Cred­itSights Inc., ques­tioned the bank's abil­ity to meet its in­ter­est pay­ments next year if lit­i­ga­tion costs were higher than ex­pected or if prof­itabil­ity slumped. On Feb. 9, co-Chief Ex­ec­u­tive Of­fi­cer John Cryan was moved to pen a note to em­ploy­ees to "re­as­sure the mar­ket of our ca­pac­ity and com­mit­ment to pay coupons to in­vestors." Even though, in the past few weeks, the pres­sure in the de­riv­a­tives mar­ket has eased, the mar­ket is still pric­ing de­fault in­sur­ance at three times its cost in Oc­to­ber. Juer­gen Fitschen, the other co-CEO, told Stern mag­a­zine that "it can­not be ex­cluded that there is a bank some­where in Europe that can go bank­rupt." Given the re­cent tra­vails of his in­sti­tu­tion, it's in­ter­est­ing to spec­u­late what the au­thor­i­ties would do in the un­likely event Ger­many's big­gest bank threat­ened to blow up. Un­for­tu­nately, the an­swer is that tax­pay­ers would prob­a­bly still find them­selves on the hook, al­beit af­ter stock and bond­hold­ers had felt their fair share of the pain. I've ar­gued for years that a pol­icy er­ror on the part of U.S. au­thor­i­ties wors­ened the credit cri­sis. When Bear Stearns threat­ened to go bang, they un­der­wrote its pur­chase by JPMor­gan, which meant the sub­se­quent de­ci­sion not to res­cue Lehman Brothers sur­prised the mar­ket.

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