There are eerie parallels between the recent precipitous falls in the shares of most European banks and the stomach-churning gyrations seen in September and October 2008. However, if governments, regulators and bankers had done more to address the root causes of the first crisis, then surely this second one might have been averted?
The symptoms are certainly similar: in the last couple of weeks we've seen hair-raising plunges in the share prices of leading banks and insurers amid panic and mayhem in the markets; abortive attempts by eurozone governments to prop up the shares of financial institutions with short selling bans; a flight to the safety of gold, whose price soared to $1825.99 an ounce, and top-rated government bonds; and a surge in the credit default swaps used to insure banks’ debt (the CDS on Barclays jumped to 390bp last Friday).
Banks (in)ability to fund themselves remains a core issue. This time around, the EU leaders' cack-handed handling of the eurozone sovereign debt crisis, coupled with investors' continuing uncertainty about the banks’ true level of exposure to PIIGs debt, has dented investors trust in banks and made them reluctant to provide short-term funding. Last time it was fear of subprime contagion.
Unfortunately, ill-considered and reckless lending to over-indebted, irresponsible and sometimes mendacious borrowers is a common strand. If you're interested Reuters IFR has provided a fascinating insight into the funding crunch banks are facing, while the BBC's Robert Peston has explored how the interconnectedness of markets was exacerbating the picture for banks.
It didn't help much when it emerged on Wednesday that the engine of Europe's economy, Germany, had spluttered and stalled (in the second quarter German growth came in at just 0.1%, way below expectations, while eurozone growth came in at just 0.2%). These anaemic figures gave rise to fears of a double dip recession on both sides of the Atlantic, which immediately effected the banks (after all, a double-dip would create a further sea of bad debts and stymie their recovery plans).
Markets were further spooked when it emerged that an unidentified European bank had taken $500m in emergency, one-week funding from the ECB. Then on August 18, The Wall Street Journal published a story saying US regulators have been scrutinizing the dollar funding positions of the US subsidiaries of European banks. The sense of déjà vu was overwhelming, and many were bracing thesmelves for another Lehman seizure.
However, I would contend that factors such as weaker-than-expected growth, a possible return to recession, and a little local funding difficulty ought to be water off a duck's back for any solid and well-managed financial institution. Had the banks driven real change through their organizations and genuinely sought to reinvent their business models to ensure they had a sustainable future in the wake of the October 2008 -- and I'm afraid that continental banks have been dragging their heels even more than their US and UK counterparts in this regard -- they would have been much less likely to be blown over.
Hope for the future?
I accept some banks have made important changes. Some have abandoned the hubristic dreams of empire (HSBC, RBS and Lloyds are all exiting scores of overseas markets and selling off non-core businesses) that obsessed their management pre-crisis. Some have scaled back their dangerously bloated pre-crisis balance sheets, some have partially weaned themselves off state-subsidized funding, and some have bolstered their capital positions.
But this has, for the most part, been tinkering around the edges. It seems to me that a great many banks remain firmly ‘in denial’. Barclays’ Bob Diamond and Deutsche Bank’s Josef Ackerman spring to mind as leaders who have done more than most to resist attempts at reform. Both of these senior bankers have, I believe, sought to undermine attempts to rein in bonuses; scare-mongered about the economic impact of capital and liquidity reforms; obfuscated in front of political juries and commissions; and arm-twisted EU politicians into ensuring their institutions don't get short-changed in the event that peripheral members of the eurozone default (whilst apparently having few qualms about condemning the citizens of these countries to decades of austerity). Diamond has made clear he thinks the time for remorse and apologies is over, and that it would be great for everyone if the politicians would just get off their backs and let the banks get back to “business as usual”.
Well, I'm afraid it's becoming increasingly apparent that Diamond is wrong. With this second crisis, it's clear that the need for a fresh approach, and one that is not dictated by bankers, is more urgent than ever. If Europe's politicians have learnt nothing else from the past few years, it is that allowing themselves to be steered by discredited bankers means they will probably drive their economies into a cul-de-sac.
Further reading on the banking crisis and how to reform banking:-
- Ban Share Options and Stop Subsidizing Banks Before Recovery by Andrew Smithers
- Understanding and Forecasting the Credit Cycle—Why the Mainstream Paradigm in Economics and Finance Collapsed by Richard A. Werner
- Banking Transparency and the Robustness of the Banking System by Solomon Tadesse
- BoE governor Mervyn King and the case for reforming Britain's banks by Ian Fraser
- Bankers square up to regulators over economic fallout of Basel III by Ian Fraser
Tags: banking , banking sector , banking sector reform , Barclays Bank , BBC , Bob Diamond , CDS , economic governance , EU , european debt crisis , eurozone , financial crisis , GDP growth , Germany , global recession , gold , Josef Ackerman , PIIGS , RBS , Robert Peston , Royal Bank of Scotland (RBS) , short selling ban , sovereign debt , UK , US , US economy , Wall Street Journal , WSJ