european central bank

The European problems with banks

There are many large banks in Europe – even by world standards. The figures behind the graphs were picked up around the net, so they are probably not very accurate; but they are close enough for the purpose of giving the intelligent, but uninformed reader a rough idea of the larger issues.

The size of the banks

First there is the group of the very, very large with banks like Deutsche Bank, Barclays PLC (LON:BARC) (NYSE:BCS) etc, right up among the huge US, Chinese and Japanese – and showing about as much pulse. Then there is the group of very large banks: ING of Netherlands and Well Fargo of the US – that ilk. Next there are the large banks like Nordea of Sweden and Goldman Sachs Group, Inc. (NYSE:GS) of the US – banks with some right to separate toilet facilities for management. Finally: The pretenders like Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) and Bank of Montreal (NYSE:BMO) (TSE:BMO)- and the colonial upshots from Brazil and Australia.

Banking does show a very low degree of consolidation as a business, not like motorcars where there are very big firms with household named brands like Volkswagen AG (PINK:VLKAY) (PINK:VLKPY), General Motors Company (NYSE:GM) and Toyota. In banking there is only a factor 5 between no. 1 and no. 50. Nothing like computers in the old days, when there was International Business Machines Corp. (NYSE:IBM), and then all the riff-raff.

But the banks are – each of them – in their own right large enough to create a national distress of some magnitude, for those who haven’t seen President Obama’s hair greying these last few years.

world 53 largest banks

The internationalisation of banks

Some of the larger banks  have branches worldwide, though perhaps not as much as they would like, but by far large enough not to know which pockets the different subsidiaries have their hand into. This is a particular problem with the British Banks that are large and cling on to the old colonial empire – Spain has some of those problems as well. This gets obnoxious as banks never write off losses and tend to sneak them back from impairments every opportunity they get.

But for Europe the problem is far more that the banks criss-cross European National borders.

The Euro-zone

It is an issue that the European banks use different currencies as opposed to the US, the Chinese and the Japanese banks. One should be careful now, not to mix the currency issue up with a much more sinister aspect: Which central bank, nation and not least taxpayer are responsible for which bank. The currency issue is mainly dealt with by bolting a national currency to the EUR. Even Norway – remaining proudly outside the sorry mess – is in its economy so integrated that they are more or less a “fax-member” of the EU, to use David Cameron’s expression (meaning that they get fax-copies of every EU decision which they then translate and implement in their own legislation ASAP).

Though there are dim-witted romantics who dream of having their own currency, and through debasing the coin export their problem onto their neighbors, they are hardly to be taken serious. Between 2/3 and ¾ of all export of even the larger EU countries is intra-EU, so a debasement of the currency will lead to rampant inflation in a country through imports. A German couldn’t care less if his ham once spoke Italian or Dutch, price and quality is what matters. So the exchange rate is really a ham/car ratio, rather than a ration between bits of paper.

This basic fact hasn’t quite gotten through to the Chinese – yet: They try to keep the RMB undervalued with respect to the USD and undervalued as far as the EUR is concerned. Which means they are giving away their stuff to the Europeans and paying through the nose for the US food imports.

Who is liable for a bank and obliged to control?

The important issue is however the question of which central bank is to step in when a bank gets distressed. Local banks aren’t really a problem, because the nations will in their own interest look after their banks or their businesses and employment will suffer. This is the question that is currently debated between the ECB and especially the Germans.  The latter thinks that looking after more than 6000 banks in the EU would only make a huge an inefficient bureaucracy, but none are really questioning the need for a concerted effort.

On the other hand: Looking at Europe’s largest banks where each bank is nationally colour-coded looks like somebody drove a lorry into a paint store. Note that each of these banks could, in the event of failure, precipitate continent wide depression on economies that are barely scraping by at the moment. We are not just talking nations of 3-5 million people (again – who in America would even find out if Wyoming went missing? – most Europeans can’t pronounce the Republic of Srebska), we are talking major nations of the size of France, Italy and the United Kingdom with populations of 60 million.

And no: Germany is not in any better position than the others! Despite a population of 80 million plus they have Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB), where it is getting to be a problem to find out which executive is having a court appearance today and Commerzbank.

Differences in European banking structure

On one extreme there is the UK with 3-4 of the very, very large banks and few small ones (Spain is having a somewhat similar problem),where in the event of joining the European Bank Inspection the Bank of England would have very little to do – so that is not likely to happen.

France and Germany have a more even distribution of bank sizes. Here the problem is clearly to find the cut-off point – A German regional bank has sneaked up in the top 40.

Italy has got really ultra large banks; but a host of other – each of which is large enough to tumble the unstable scaffold.

The Nordic countries

While neither Norway nor Finland really have national banks worth mentioning in the large bank question, and Denmark has Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY) that it quite out of proportion to the country side, Sweden combines all the drawbacks mentioned up to now in the worst possible way.

They have several disproportionately large banks with Nordea Bank AB (STO:NDA-SEK) as the conspicuous entity; but SEB, Svenska Handelsbanken and Swedbank. Not only that; but they are disproportionally large in their foreign subsidiaries: Not only is Nordea large in Denmark and Finland; but they generally have large representations in the Baltic States – a finger in every pie – provided you can lose money in it.

Sweden is in a similar situation to Britain in so far as they are both non-Euro-zone countries with a highly consolidated banking sector. Sweden has opted out of the European Bank Inspection, as has Great Britain.

The Nordic countries each have their own currency, with only Finland a member of the Euro-zone and Norway not even a member of the EU.

The deeper problem for Sweden is that it is abundantly clear that the country cannot handle its banks on their own power. In the 1990’ies Sweden had a banking crisis they never really came out of, with Nordea still 20% state owned. The other side of matter is that it is hard to see Sweden and its banks on the same side of the European finance world as the rest of the EU-members.

The battle of the CB’s

If you look at the CB’s interest rates, 2009 saw the Swedish knocked down to ¼%, where Norway and Finland stabilised fairly quickly; but Denmark has continued to suffer from a massive inflow of foreign capital. The obvious explanation forwarded ascribing it to first Greece and then Spain is at best insufficient. The key is probably Nordea’s involvement with the Danish real estate mortgage market where Nordea has a 20% market share (a bit difficult to say, as the mortgage banks stopped publishing market shares years ago). To prevent a total collapse of the Danish housing market that inevitably would have led to Nordea Denmark’s bankruptcy. Nordea Bank AB (STO:NDA-SEK) has apparently bought the real estate bonds to protect the bank loans on top of the mortgages. Danish housing loans (mortgage and bank) to private owner is on its own the size of Denmarks GDP.

The other mortgage banks have received massive support in from the CB, where at one time 1/6 of the GDP were loaned to the banks with flexible mortgage rate bonds as collateral. Danske Bank A/S (CPH:DANSKE) (PINK:DNSKY)– it has now been revealed – got huge support from the CB and the pension fund ATP (rumours in the press speak of loans of also about 1/6 of GDP –  but no firm confirmation – other than a truly staggering 2009 result for ATP).

The whole debacle around SAS would have been an obviously strongly required reminder to Nordea (and SEB) that interference from Nordea Bank AB (STO:NDA-SEK) would be punished with harsh cruelty. For the moment it seems like Nordea has crept back under its rock; but the real issue here is that it is number one priority for the Danish government to save the Danish mortgage system – explicitly!

As seen from the EU perspective: On first sight the problem would seem minor – as the Nordic banks are minor; but it involves (in Finland) the issue of the integrity of the EUR. Secondly: A Nordic bank crash would have repercussions far greater than Greece could ever have. The Nordic countries do behave generally reasonably – economically speaking – which makes it more than difficult to admonish.

The Nordic banking crisis is potentially more severe than a Spanish meltdown and will be hard to brush aside. It is even harder to imagine the ECB letting the financial weapon of mass destruction in the Swedish banks roam out of any sort of control, as it is not likely Sweden has the capacity to contain Nordea Bank AB (STO:NDA-SEK) that has shown itself willing to go to the very limit.

The problem is however how to extricate Nordea (and the other Swedish banks) from the other Nordic countries – Norway as a rather large oil producer will not suffer too much. But Denmark and especially Finland will be another matter. The part state owned Nordea might have dreams of repossessing Copenhagen; but that is not really a solution. Sweden obviously cannot hand over sovereign control of their banking  – which leaves little alternative but  for the EU to defend the others from Sweden.

Significantly enough: Figures have been held back and banks are closed between now and new year.