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The distress in Europe encompasses big banks as well as smaller ones. It has affected behemoths within the euro area such as Société Générale and Deutsche Bank (see article)—both of which saw their shares fall by 10% in hours this week—as well as giants outside it such as Barclays (based in Britain) and Credit Suisse (Switzerland).
The apparent frailty of European banks is especially disappointing given the efforts made in recent years to make them more robust, both through capital-raising and tougher regulation. Euro-zone banks issued over €250 billion ($280 billion) of new equity between 2007, when the global financial crisis began, and 2014, when the ECB took charge of supervising them. Before taking on the job, it combed through the books of 130 of the euro zone’s most important banks and found only modest shortfalls in capital.
Some of the recent weakness in European banking shares arises from wider worries about the world economy that have also driven down financial stocks elsewhere. A slowdown in global growth is one threat. Another is that the negative interest rates being pursued by central banks to try to prod more life into economies will further sap banks’ profits. A retreat in Japanese bank shares turned into a rout following such a decision in late January. Investors in European banks fret not just about lacklustre growth but also a possible move deeper into negative territory by the ECB in March. On February 11th Sweden’s central bank cut its benchmark rate from -0.35% to -0.5%, prompting shares in Swedish banks to tumble.
But the malaise of European banking stocks has deeper roots. The fundamental problem is both that there are too many banks in Europe and that many are not profitable enough because they have clung to flawed business models. European investment banks lack the deep domestic capital markets that give their American competitors an edge. Deutsche, for instance, has only just resolved to hack back its investment bank in the face of a less hospitable regulatory environment following the financial crisis.
And there are still too many poorly performing smaller banks within national markets. Although this year’s share-price declines have been steepest in Greece, these largely reflect renewed political tensions over implementing the country’s third bail-out. The banks arousing fresh concern are those in Italy, whose troubles go beyond an excess of them. One specific worry is the dire state of the country’s third-biggest (and the world’s oldest) bank, Monte dei Paschi di Siena, which has long been in intensive care and whose share price has fallen by 56% this year. Its woes reflect poor governance, a problem that plagues Italian banks, many of which are part-owned by local, politically connected foundations.