Do European banks need more capital?
Maybe so, but I have a sneaking suspicion they are not about to get much of it, not anytime soon. Corina Ruhe reports, and I say put on your Bayesian thinking cap for this bit:
Bundesbank board member Andreas Dombret…said in an interview with Boersen-Zeitung that the revised rules, due by year-end, mustn’t disproportionately affect European banks. “Not significant means an increase of zero percent or near to zero percent; that has to be the starting point for all negotiations,” he said.
I like to negotiate that way too, when I can. What might the French be saying?:
“We are in favor of Basel III, but we think it is unhelpful, even dangerous, to want to add layer upon layer of obligations on banks, in particular on European banks,” French Finance Minister Michel Sapin said on Monday.
Are you starting to see a pattern? Neither the governments nor the banks would find it very simple to cough up the extra resources to boost capital. And cross-border or other mergers would lead to higher capital requirements yet, given the way the regulations are written to penalize increases in bank size.
Did you know that the ECB gave Deutsche Bank special treatment in its recent stress tests? Still, I think it is more likely that Deutsche Bank is a slow wasteful drain rather than the next explosive Lehman Brothers, if only because the level of financial risk paranoia is so high.
The more fundamental point is that there is significant excess capacity in European banking. That makes it hard for DB to get back on its feet, and it may send other European banks to a similar fate, creating a chronic problem though probably not a dramatic crisis. The bank-dependent EU economies don’t have a simple way to make their banking sectors shrink a lot more. Whether or not this is necessary right now or rather later, either way it will feel a lot like that ill-defined concept “austerity.”
“Global banks are international in life but national in death,” former Bank of England governor Mervyn King once noted.
More fundamentally, there is excess capacity when it comes to EU governments as well, a less frequently recognized point. There is more and more governance, some of it good in fact, but it never goes away. There are whole new levels of governance, connected to the EU. Somewhere in the system, governance too needs to shrink. Losing a few countries through consolidation is not possible, but in terms of the pure logic (divorced from actual fact and possibilities), there is something to be said for the idea. And yet we are relying on governance to get the banks to shrink. And relying on the banks to boost growth so that governance can shrink. Relying on relying.
Get the picture?