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20Oct08: European Banking Sector
European governments come to the rescue of banks
The European agreement on a comprehensive banking rescue package reached on 12 Oct, legislated in Germany and France 17 Oct was a powerful and urgently needed response to the seizing up of the money markets.
The offer of capital injections on a voluntary basis differs from the UK approach of mandatory take-overs. For banks, the capital injections offered may give them the choice between keeping/increasing market share and maintaining independence.
The crisis shifted the advantage - in the current consolidation process - to banks with low leverage; the rescue package might halt or slow this tendency to deleverage.
The measures taken are likely to prevent a vicious circle of financial crisis and economic downturn. Instead the current recession may be shallower and end in 2H09.
Asset conclusions: generally stock positive, allows risk premia on stocks to fall and milder recession to price in. Bond neutral in short term, negative in medium term due to impact on funding needs.