Published on in Financial ServicesReshaping Business

It’s difficult to open a newspaper at the moment and not find an article lamenting the state of European banking, and Italian and German banks in particular.

Deutsche Bank – given its size, systemic importance and token of German financial muscle – is the latest to give cause for concern. So are we on the verge of another financial crisis, similar in size and shape to that of 2008?

The answer to that question is, in my view, a categorical no.

But how can you be so sure, I hear you cry? Put simply: I don’t believe that the financial and banking crisis which started almost ten years ago has ever gone away.

Just as many historians now see the Second World War as a continuation of the First separated by a twenty year pause, it might be argued that continental European banks are not facing a new crisis, but an old one that is in the process of catching up with them.

Over the past decade, and as a direct result of the near-economic collapse that would have resulted from a systemic banking failure, governments and regulators around the world forced a programme of change on a discredited banking industry.

In an attempt to address the underlying causes of the crisis, balance sheets were shrunk, capital rebuilt at the direction of the Basel Committee and regulation strengthened, both in the States (e.g. Dodds-Frank) and in Europe (e.g. the Single Resolution Mechanism).

In short, a promise was made to end the problem of banks being “too big to fail.”

Too big to timetable

Unfortunately, no timetable was set for returning the industry to a level of normality.

My view, for what it is worth, is that we are only about a third of the way through the change process.

Given the progress that has been made over the past eight years or so, and the sheer scale of the task, it would be no surprise to me if it took as long as 25 years to complete the banking reform agenda.

And this brings us to today’s problem. Even after eight years, too many banks, particularly continental European ones, remain too big, insufficiently capitalised and/or unprofitable.

Although some reforms have been undertaken over the past eight years or so, the change agenda hasn’t been driven hard enough or quickly enough.  And now many find themselves facing another issue that will make reform even harder to deliver.

Quantitative difficulties

In the face of low growth economies, the European Central Bank (ECB) has initiated a programme of quantitative easing which involves cutting interest rates even into negative territory.

Such a policy inevitably and adversely impacts the net interest margin, a key driver of bank profitability.

As returns fall, a bank’s ability to finance large change programmes diminishes, which, in turn, further slows the change agenda.

So, does this mean that European banks are in crisis?

Well, much work certainly needs to be undertaken in Italy, where – although steps have been taken to address the legacy of more than €200 billion in under-performing loans which are currently carried on bank balance sheets – much more needs to be done.

A start would be implementing the IMF’s recent recommendations that recapitalising banks such as Monte dei Paschi di Siena and others should be prioritised, as should examining the asset quality of smaller banks that fall outside the jurisdiction of the ECB.

And it also proposed that the country’s recent reform of insolvency law should be extended to include existing non-performing loans, and not just new ones

Fragmented sectors, fragmenting problems

Of course, not all of Europe faces the same issues.

Germany’s banking problem is a lack of profitability which is breaking the sector’s business model.

The European Banking Authority has found that, in the first quarter of 2016, the German banking sector’s return on equity was just 2.6%, only just ahead of that of Greece and Portugal.

This stems from the country having a highly fragmented banking sector, which results in the five largest banks, in 2014, having a market share of just 32%, compared to, say, Britain, where the five largest banks had a share of around 85% in the same year.

Picking up the pace

Much of the nervousness surrounding banking stocks that the media has reported this year can be attributed to a slow-moving reform agenda.

However, at Fujitsu, we think that we are starting to see some change.

Continental European banks with which we are speaking increasingly recognise that doing nothing is no longer an option.

Moves to stabilise the European banking system are to be welcomed.

Eight years on from the start of the financial crisis, much more work remains to be done. Change is overdue, making the road ahead long.

But, until fundamental issues are addressed and resolved, we won’t be facing a new financial crisis but living with an old one that simply won’t go away.

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Anthony Duffy

Director of Retail Banking at Fujitsu
Anthony Duffy is a highly experienced company director, senior manager and management consultant who has worked in the financial services industry and as an advisor to government for over thirty years.

In addition to advising numerous UK and continental European financial services organizations, Anthony has also held senior line management positions, including  as Director of Strategy for a FTSE-100 bank; Deputy Managing Director of a UK commercial bank; and Managing Director of a UK asset finance company.  He has also worked in central government, advising Cabinet ministers of the development and passage of company legislation.  

Anthony joined Fujitsu in February 2012.

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