World Economy

European Banks Cry for Help

European Banks Cry for HelpEuropean Banks Cry for Help

Europe’s banks are grappling with a combination of tighter regulation and a weak economic climate. Their shares have been pummeled, prompting managers to call on central banks to intervene.

“It’s not a great time to be a bank.” Last week’s statement by Credit Suisse Chief Executive Tidjane Thiam just about sums up the mood in Europe’s banking sector, DW reported.

Banks’ share prices have been hammered in recent weeks, with the benchmark Euro Stoxx banks index down 23% so far this year. Credit Default Swaps, which are used to insure against debt default, have shot up, reflecting a higher risk of default.

Credit Suisse, one of Europe’s top three banks, last week announced a loss of €5.8 billion ($6.45 billion) for 2015. Deutsche Bank CEO John  Cryan was not joking last October when he warned staff and investors “not to expect only sweetness and light in the coming months.”

  Losses All Around

At the end of January, the bank reported a staggering loss of €6.8 billion for 2015. Deutsche is also mired in no less than 6,000 litigation cases.

In Italy, four banks had to be bailed out in November. Italy’s banks are sitting on €201 billion of bad debt, the highest level in Europe. The country also has far too many banks, which the government has said needs to change.

In total, eurozone banks have some €1.9 trillion in loans that aren’t being paid back on time.

Adding to the banks’ woes is the EU’s “Bank Recovery and Resolution Directive”–also known as bail-in rules–which has been in force since January. It stipulates that some of the cost of bank rescues have to be coughed up by shareholders and investors, rather than the public purse.

The directive is part of a drive by European regulators for greater accountability in the banking sector after the 2008/2009 financial crisis.

Add to that a weak global economic climate and tumbling oil prices and you know why bank bosses do not rest easy at the moment.

  ‘Help’, Mario!

In fact, they are so worried they have called on the ECB to help. Unicredit CEO Federico Ghizzoni even demanded concerted action by the major central banks. “One central bank alone is not enough, so there is a need for strong coordination among the most important ones in the US, Europe, Japan and maybe also China,” he recently told Bloomberg Television.

German business daily “Handelsblatt” quotes a bank manager as saying that “it’s time for the ECB to intervene,” without giving a name. Another manager told the paper that the banks alone could not “overcome the crisis.”

But ECB President Mario Draghi is keeping his cool. Speaking in the European Parliament on Monday, he said that the banks were far more solid than a few years ago, and that they had “significantly strengthened their capital positions” following ECB stress tests.

  Stricter Regulation

The paper says they are demanding that the ECB buy their bonds, which have come under pressure recently. They also say that regulatory changes are happening too quickly.

Thomas Hartmann-Wendels, a banking professor at the University of Cologne, told DW that while stricter regulation of the banking sector was clearly necessary, “some developments are going too far. For example, the fact that some regulators are calling for banks’ own risk assessment models to be scrapped. That’s counterproductive, the focus on regulation here is too strong.”

The international Basel Committee on Banking Supervision requires banks to use standard models for risk assessment that are used to determine a bank’s capital requirements.