In a recent interview with Agence France-Presse, Isabel Schnabel, an Executive Member of the ECB board, was asked if the ECB will imitate the Fed. Recently, the Fed shifted its mandate from inflation targeting to average inflation targeting. The question made sense in the context of the ECB being in the process of reviewing its mandate too.
Obviously, she could not give a precise answer at this point. However, she mentioned that the Euro area is very different from the United States in many aspects. One of them – the financial system, is much more bank-based.
Which brings us to the subject of this article. European banks keep having a hard time. Not only that, the sector did not recover at all since the 2008-2009 Great Financial Crisis but is going from bad to worse.
New Lows for the European Banking System
We talk about undercapitalized banks, a decrepit and vulnerable banking system. Truth be told, the European banking system moved from one crisis to another.
After the 2008-2009 collapse, the sovereign crisis in 2012 pushed banks to the lows again. What followed proved to be just a bounce on most banks’ charts.
However on the other hand, other jurisdictions (e.g., United States) got their house in order. After the Lehman Brothers collapse, the United States banking sector strengthened considerably. Banks capitalization increased as regulators imposed tougher rules.
Speaking of Lehman Brothers, this is the BBVA current chart. BBVA is one of the major Spanish banks, one so vulnerable that all it needs is a little push to fall over the cliff.
If the pandemic was not enough, the current turmoil in Turkey, where BBVA has a big exposure, weighs on the company’s stock price. Its price-to-book value has ratios similar to the ones seen at Bear Stearns before its collapse. This is Europe 2020 and shows that little has changed in the last fifteen years or so.
BBVA is just an example. The entire sector struggles, with Deutsche Bank being another example. Regulators encourage mergers in the sector for the simple reason that the sector is too fragmented – hence, difficult to regulate.
Six months into the coronavirus pandemic, we still do not know how long it will last and what the final consequences will be. But we do know that the market will not tolerate such charts like the one above.
Focus on the 2020 price action. The bank lost about 60% of the value in the last nine months or so. With the state unable to bail banks out, because the money is used to bail the population and jobs, expect the European banking system to have a hard time in this crisis.
Casualties are not excluded.