Despite the trillions of euros thrown at Europe’s banks since 2008, in the form of direct government bailouts, government guarantees, asset buying programs, toxic loan purchases and the unending string of LTRO and TLTRO (virtually free loan) programs, the old continent’s banking system is as rickety as ever.
The Euro Stoxx 600 bank index, which covers major European lenders, slumped 3.9% last week and is down over 25% since the beginning of this year. This is nothing new, merely the latest episode in a decade-long saga of decline and fall, as the following graph, courtesy of my WS colleague Wolf Richter, illustrates.
Things have gotten so bad that the EU is now even dialling back some of the timid banking regulations it passed in recent years. Last week, hundreds of small and mid-sized lenders from across Europe breathed a collective sigh of relief when the European Parliament agreed that EU-level anti-crisis requirements should only be applicable to banks with consolidated balance sheets of more than €100 billion.
Those requirements include the EU’s famous bail-in rule under which banks must have subordinated liabilities — debt that can be liquidated in the event of a collapse — equivalent to 8% of their total liabilities and own funds. This is the total level of losses that must be imposed on investors in the resolution of a bank before access is granted to rescue funds.
Just two years ago, at the height of the ECB’s QE program, when yields on virtually everything were unnaturally low, it was insanely cheap to issue bail-in-able debt, such as senior non-preferred bonds or contingent convertible (co-co) bonds. But the tide has since changed and it is growing prohibitively expensive to issue these types of debt, even for some of Europe’s largest lenders.
In October Italy’s one-and-only global systemically important bank, Unicredit, had to shell out the equivalent of 420 basis points over the euro swap rate to issue €3 billion in dollar denominated five-year senior non-preferred bonds — six times more than the 70 basis points over swaps it paid on the same class and duration of debt in January. More worrisome still, the bank chose — or rather, had little choice but — to raise its latest round of funding privately with just one investor, the world’s biggest bond buyer, Pimco, which clearly had the upper hand in the deal.
Another mega-lender that has felt increasingly compelled to turn to private buyers for money is Spain’s Banco Santander, which has issued €1.3 billion in private placements so far this year. There are also growing concerns that Santander could, in the coming months, become the first European bank ever to extend rather than redeem a batch of contingent convertible (or co-co) bonds, due to the likely high cost of refinancing them.
Other Spanish banks haven’t even bothered trying to issue bail-in-able debt in recent months. They know that against the current market backdrop the cost of issuing new anti-crisis debt will be eye wateringly high, a fact that was all but confirmed a few weeks ago when embattled Spanish lender Banco Sabadell paid 520 basis points over the Euro swap to issue a mere €500 million of senior non-preferred debt.
If it’s prohibitively expensive for large or mid-sized banks to issue anti-crisis debt, imagine what it’s been like for smaller ones. Hence, their collective sigh of relief on the announcement that they would be exempt from having to issue the stuff.
While this may be good news for the banks concerned, it’s not such good news for EU taxpayers, who could once again be called upon in the event of a collapse. Either that or other creditors, including even depositors, could be at risk, as the rating agency Fitch warns.
Another massive problem for European banks — their almost one trillion euros of non-performing loans — was also consigned to the back burner this week when the European parliament approved new rules that would soften requirements on the money that banks must set aside to cover potential losses from new debt that turns sour. As Reuters reports:
“[The new rules] represent an easing of the requirements from a deal reached in October by EU governments, which in turn had softened an earlier European Commission proposal.”
While the ratio of toxic loans in Europe has declined over the last year by roughly one percentage point, to 4.4%, the absolute figure, at around €900 billion, remains elevated. In fact, it is over €100 billion more than the total market capitalization of the MSCI Europe Bank index. To compound matters, the provision ratio is also too small.
But the ratio is not going to get any bigger any time soon, thanks to the latest rule change in Brussels. The parliament also ratified a plan to give banks nine full years to build a full buffer against bad loans that are secured by immovable collateral, such as houses or commercial properties, and seven years to secure against less safe movable capital.
The parliament’s ultimate sweetener came in the provisioning calendar. EU states had agreed that banks should provide for at least 35% of their exposure to unsecured loans two years after they became bad, before full coverage kicks in after three years. But the parliament cancelled the intermediate requirement.
Unsurprisingly, the new rules were met with scorn, derision and criticism from some quarters. “This is not a prudent approach and does not lead to the risk reduction we need to achieve in European banks’ balance sheets,” thundered Sven Giegold, a Green lawmaker who voted against the watered-down text.
Rather than trying to fix the age-old problems that inflict the EU’s rickety banking system, Brussels has, as always, opted to kick the can a little further down the road, even as the gargantuan problems facing the banks continue to stack up. In so doing, all it can hope to achieve is to prolong the pain and postpone the inevitable.