Europe's Most Distressing Chart: For Banks 2016 Is Already Worse Than 2008

Tyler Durden's picture

As we have reported previously on various occasions things are bad for European banks: from DB's record wide 5Y Sub CDS, to Credit Suisse record low stock price, to everyone else inbetween. But did you know that for most European banks, 2016 is shaping up far worse than the dreaded 2008? As the following chart from Reuters shows, the year-to-date stock price performance for most European banks is on pace to far surpass - to the downside - the dreadful for the global financial system 2008.

As Reuters puts its it, "Euro zone banks have seen their shares plummet by nearly 30 percent and yields on their bonds surge since the start of the year, as investors worried about thinning profits and uncomfortably high levels of bad loans in some countries."

This is shown in the chart below.

 

One problem resulting from this collapse is well framed by Reuters: "A protracted selloff in the shares and bonds of euro zone banks has the potential to knock the fragile economic recovery off track by raising financing costs for banks, limiting their ability to lend. It may also undo some of what the European Central Bank has been trying to do to increase bank lending an pump up inflation via spending.

The selloff makes it more expensive for banks to raise capital on the market by selling shares or bonds.

 

If this situation were to last, it would dent banks' capacity to grow their balance sheets by extending new loans to companies and households. This would jeopardise a tentative rebound in lending driven by the ECB's ultra-easy monetary policy.

 

"This can have an impact on the economy, which is bank dependent in Europe," said Sascha Steffen, professor of finance at the University of Mannheim. "And of course it puts more pressure on the ECB because it doesn't help it bring back inflation."

 

Bank lending in the euro zone started growing again in 2015 after shrinking for three years, but data for December data pointed to a loss of momentum.

 

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But the sheer magnitude of the market rout shows investors are losing confidence in the sector.  A key transmission channel is the market for Additional Tier 1 (AT1) notes - bonds that can be converted into equity under certain conditions and on which the issuer can decide whether or not to make coupon payments.

 

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"For the past year, ECB easing has been accompanied by private banks' easing of credit conditions," said Marco Troiano, a director at ratings agency Scope. "If market volatility reverses this, banks would tighten lending, negating some of the ECB's efforts."

In other words, after the BOJ's and the Fed's recent policy failures, unless the ECB stabilizes Europe's banking sector, it too will have committed the gravest of central bank sins: policy error.

The problem, however, as Deutsche Bank explained very well in the post preceding this, is that there is a problem: while the market is desperately begging for a circuit breaker, nobody - certainly not the ECB - has any idea either what it should look like, or whether it could work.