It’s not just Deutsche. European banking is utterly broken

As was said in an earlier post, the fines imposed by the DoJ are ironically what the balance sheet looks like for Deutsche Bank, Volksagen et al. It’s economic warfare in that case.


Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it’s not the same crisis; in large measure, it is completely different.

Today’s mayhem is not so much the result of reckless bankers and people asleep at the wheel of regulation, but rather of the public policy response to the last crisis itself – that is to say, regulatory overreach and central bank money printing.

All eyes are naturally focused on the specific problems of Deutsche Bank, but Deutsche is in truth no more than the canary in the coal mine.

As Tidjane Thiam, chief executive of Credit Suisse, observed last week, as an entire sector, European banks are still “not really investable”. Much the same disease as afflicts Continental banks also applies to British counterparts, including Royal Bank of Scotland, Barclays and even Lloyds.

All are fast being enveloped by a perfect storm of negatives, and this time around, it is substantially the policymakers and law enforcers who are to blame.

There are essentially four factors at work here.

First, it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years. In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears.

Third comes the apparently never ending misery of misconduct fines, which for the US seem to have become just another way of further taxing the banks, particularly the European ones, routinely threatened as they are with removal of their dollar clearing licences should they try to resist. Nine years after the event, there is still no let up. It’s a classic case of justice delayed being justice denied.

Typically, banks to settle for around half the amount initially demanded, as now seems likely with Deutsche Bank, but even so, the fines seem to be assessed almost wholly on ability to pay rather than the extent of the misconduct itself.

The political posturing involved is quite breathtaking. The Department of Justice is hoping to secure a giant omnibus settlement involving Deutsche, Credit Suisse and Barclays all rolled into one, timed for announcement just ahead of the presidential election.

It’s Royal Bank of Scotland’s turn next – not good given that its exposure to the sub-prime debacle was even larger than Deutsche Bank’s.

Full article: It’s not just Deutsche. European banking is utterly broken (Sydney Morning Herald)

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