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European Banks Keep Underperforming


Posted: Friday, September 25th, 2020

Estimated Reading Time: 2 minutes

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Europe banks keep going from crisis to crisis. After the 2008-2009 Great Financial Crisis, the European banking sector did never fully recover. In fact, many would argue that it is in a worse shape today than twelve years ago.

The European financial system differs from the American one. European banks play a crucial role in the monetary transmission mechanism, and the European Central Bank (ECB) knows it very well. This is one of the reasons why an average inflation targeting regime, like the one adopted recently by the Fed in the United States, is unlikely to fit in Europe.

Macro surprises continue to surprise negatively in Europe. Besides Japan, Europe is the only major region in the world where this happens.

European Banks

Perfect Storm Ahead for the European Banks

When compared to the STOXX Europe 600, the European banks underperform dramatically. Not only that they are underperforming the overall stock market, but the perspective ahead looks terrible.

European Banking System

consider the negative interest rates environment. For several years now, the ECB keeps the deposit facility rate below zero. One of the side effects – European banks’ profitability declines.

Second, the COVID-19 related recession puts further pressure on the European banking sector. After the Great Financial Crisis, the United States urged its commercial banks to capitalize, something that did not happen in Europe.

All these, coupled with FinCEN investigations, led to extreme weakness in the European banking system.

Turkey Puts Further Pressure on the European Banks

Turkey holds the headlines recently for all the wrong reasons. Its currency, the Turkish Lira, depreciated dramatically. Almost every day it fells to a new all-time low against the world’s reserve currency – the U.S. dollar.

As such, inflation soared. Local banks came under pressure too. But many European banks have a great exposure to Turkey. For example, one of the biggest Spanish banks, BBVA, holds a big stake in the Turkish Garanti bank.

BBVA currently trades at less than 50% its start of the year market value. In the meantime, the stock market recovered. Even the European indices bounced. However, European banks failed to follow.

Moreover, on any return to a risk-off move in the world’s equity markets, European banks are the first ones to tank some more. In fact, the recent move broke below the 2008-2009 low and reached levels not seen since the dot.com bubble in the late 90s.

The European Union may have agreed on joint debt issuance this year – a milestone for future fiscal policy. But if it cannot get its banking house in order sooner rather than later, then its very existence is threatened.

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