Europe's Banking Dysfunction Worsens

Tyler Durden's picture

Authored by Chris Whalen via The Institutional Risk Analyst,

“While the US and the UK have been mired in political chaos this year, the EU has enjoyed improved economic conditions and some political windfalls. The question now is whether this good news will inspire long-needed EU and eurozone reforms, or merely fuel complacency – and thus set the stage for another crisis down the road.”


Philippe Legrain, Project Syndicate

This week The Institutional Risk Analyst takes a look a the recent reports out of the EU regarding a proposal to “freeze” the retail accounts of failing European banks.  The original story in Reuters suggests that our friends in Europe actually think that telling the public that they will not have access to their funds, even funds covered by official deposit insurance schemes, is somehow helpful to addressing Europe’s troubled banking system.  Investors who think that Europe is close to adopting an effective approach to dealing with failing banks may want to think again.

Judging by the reaction to the story by investors and on social media, it appears that the EU has learned nothing about managing public confidence when it comes to the banking sector.  In particular, the idea that the banking public – who generally fall well-below the maximum deposit insurance limit – would ever be denied access to cash virtually ensues that deposit runs and wider contagion will occur in Europe next time a depository institution gets into trouble.

“The plan, if agreed, would contrast with legislative proposals made by the European Commission in November that aimed to strengthen supervisors' powers to suspend withdrawals,” Reuters reports, “but excluded from the moratorium insured depositors, which under EU rules are those below 100,000 euros ($117,000).

While some Wall Street analysts are encouraging investors to jump into EU bank stocks, the fact is that there remains nearly €1 trillion in bad loans within the European banking system.  This represents 6.7% of the EU economy, according to a report and action plan considered by EU finance ministers earlier this month.  That compares with non-performing loans (NPL) ratios in the US and Japan of 1.7 per cent and 1.6 per cent of gross domestic product, respectively.

But the most basic point to make about the proposal for a “temporary” suspension of access to cash is that such moves never work.  Moratoria are part of the banking laws in Germany and many other European nations, but they are never used because once invoked the institution is dead for all practical purposes.  In Spain, for example, the government had the power to impose a temporary suspension of access to deposits in the case of Banco Popular, but did not do so because it would have killed the franchise.

Jochen Sanio, the former president of the German Federal Financial Supervisory Authority (BaFin), commented about banks subject to “temporary” deposit moratoria that “they never come back.”  Sanio, who guided Germany through the 2008 financial crisis and forced the clean-up of insolvent state-owned banks, was retired and gagged for the rest of his life for challenging Germany’s corrupt political status quo of covert bailouts.

So again, one has to wonder, why any responsible official in Europe would support the plan reported by ReutersAs the US learned the hard way in the 1930s and with the S&L crisis in the 1980s, the lack of a robust national deposit insurance function to protect retail depositors leaves an entire society vulnerable to banks runs and debt deflation.  Until the EU is prepared to do “whatever is necessary,” to paraphrase ECB chief Mario Draghi, in order to protect retail bank depositors, the EU will remain far from being a united political economy.

Readers of The IRA may recall the comments of German Chancellor Angela Merkel last Fall, when she suggested that the German government would not support Deutsche Bank AG (NYSE:DB) in the event that the institution got into financial trouble.  At the time, DB was trading at about $12 per share in New York.  We spoke about DB and the ill-considered comments made by US and German officials from Dublin on CNBC on September 30th.

At the time, we reminded investors that political officials should never talk about a depository institution while it is still open for business.  This is a basic, well-recognized rule that has been followed by prudential regulators around the world for many years.  Yet because of the popular political pressures on elected officials such as Merkel, the temptation to engage in absurd hyperbole with respect to big banks is irresistible.

We see this latest piece of news out of Europe as further evidence that there is still no political consensus about how to deal with troubled banks.  As we learned last year, Merkel could not even make positive public comments about DB for fear of committing political suicide.

The more recent bank resolutions in Spain and Italy were made to look like touch measures in public terms, even as the Rome government quietly subsidized the senior creditors of two failed banks in the Veneto.  We noted in an earlier comment, “Fade the Great Rotation into Europe,” that the EU pretends to play tough on bank rules while bailing out the senior creditors:

“Of note, Italy is being given control over the remaining ‘bad bank’ to wind down as the assets and deposits are conveyed to Intesa SanPaolo.  This permits a bailout of senior unsecured creditors.  So Italy gets what it wants – continued circumvention of EU bailout rules. If a bank disappears, notes a well-placed EU observer, ‘state aid rules do not apply.’”

The Europeans appear to be playing a very dangerous game.  On the one hand, EU officials talk publicly about getting tough on insolvent banks and even suspending access to funds for retail depositors.  On the other hand, EU governments are continuing to bail out banks and large creditors in a display of cronyism and business as usual.

“Under the plan discussed by EU states, pay-outs could be suspended for five working days and the block could be extended to a maximum of 20 days in exceptional circumstances,” Reuters reports.  “Existing EU rules allow a two-day suspension of some payouts by failing banks, but the moratorium does not include deposits.”

Contrast the EU proposal with standard practice in the US, where the Federal Deposit Insurance Corporation (“FDIC”) begins to market troubled banks before they fail and tries to execute bank closures and sales on a Friday to avoid frightening the public.  The branches of the failed bank then open on the following business day as part of a solvent institution without any interruption in customer access to funds.

Importantly, all insured depositors, as well as brokered deposits and advances from the Federal Home Loan Banks, are always paid out by the FDIC when the failed bank is closed in order to avoid precipitating runs on other institutions. 

In Europe, on the other hand, there appear to be a significant number of officials who seriously believe that denying retail bank customers access to funds covered by deposit insurance will not result in financial contagion.  If such a proposal is adopted, the sort of bank runs seen in Cyprus and Greece could intensify and spread to the major countries in Europe.  Imagine that a large bank failure occurs in Italy next year and Italian officials tell retail customers that they will not have access to any funds for several weeks.

As we saw in 2012 in Spain and Cyprus and 2015 in Greece, retail bank runs tend to spill over into other countries and markets, creating a situation where fear takes over from rational behavior.  The trouble is, Chancellor Merkel cannot commit Germany to supporting an EU accord to support the banks in the Eurozone without ending her political career.

“If capital flight from the peripheral economies gathers pace, it could trigger runs on entire banking systems,” notes the infamous “Plan B” memo prepared for Merkel in 2012. “That would put the ECB—and thus, indirectly, the Bundesbank and Germany—on the hook for deposits worth trillions of euros.” 

In the dark days of 2012, Merkel’s government prepared for “Plan B” and was essentially ready to allow the weaker nations on the EU’s periphery – including Spain, Greece, Italy and Ireland -- to fail and drop out of euro as Germany withdrew to a core group of nations.

Just as the EU still refuses to deal with Greece’s mounting debt, likewise it cannot seem to accept that protecting the small depositors of European banks is the price to be paid for preserving social order and the EU itself. Otmar Issing, former Chief Economist and Member of the Board of the European Central Bank and the German Bundesbank, summarizes the situation: “The euro crisis is not over.”

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medium giraffe's picture

Banco not so fucking Popular

Manthong's picture


Crap.. all you need is a few trillion swaps from the Fed...

Haus-Targaryen's picture

I disagree with the article's assumption Merkel could not support the EU acting as an ultimate banking backstop without ending her career. She would simply need to go on TV and tell the German taxpayers (who suffer from an especially acute form of Stockholm Syndrome) that they have a "special responsibility" due to their history and without a strong EU tanks will start rolling across the continent in no time. 

Then the German political correctness and pc police step-in labeling anyone a nazi who disagrees with merkels assumptions. 

The Germans do a series of large wire transfers thereafter and then wonder why there is no money for education or infrastructure. They then vote for Merkel again because i) don't wanna be a nazi and ii) shell fix the system this time, for real though ...

I wish this system would just collapse already. 

NoDebt's picture

"We're not going to TAKE your money, Mr. Depositor, we're just going to FREEZE it so you can't use it again."

"Umm... I fail to see how that's any better.  In either case I can't use my money.  And I have bills to pay."

"Oh, it's better.  Trust us.  It's much better."


Doom Porn Star's picture

Draghi would monetize another half trillion euros in German Bunds at zirp/nirp at the behest of Frau Merkel if asked politely.   He likes his job, too.

Doom and Dust's picture

What German Bunds? Thought Draghi'd run out by now and besides they run a surplus.

If the Germans could fire Draghi they would have done so years ago.

Doom Porn Star's picture

German Corporates, and/or institutions that are effectively German owned/controlled, and/or PIIGS/perifery domiciled institutions floated with loans from German banks and/or vendor financed by German institutions, ect. will just have to do until it's time for German to 'pay it's fair share' to the NATO potemkin security construct and/or embark on an energy infrastructure binge, or whatever...

IMHO, none of this is a difficult to engineer as TPTB would have us all believe ( kinda like generating vast fiat digits with ctl-p ) or Germany would have already taken revenge for the occupation of the Ruhr with iron and fire instead of with briefcases and Mont Blancs.

Yen Cross's picture

   Does it matter?

Manthong's picture


Geez, YC

It’s gotta be bitch trading currency when money does not mean anything anymoar.

hooligan2009's picture

the mechanism to avoid bank rus is simple.

if the ECB can spend 60 billion A MONTH supporting bankrupt governments and companies, the ECB can print the value of threatened bank deposits and bill the country later.

since there is a banking union, one major bank fails means every bank fails - even now, those banks with NPL, represent around 0n3 tenth of those companies, friends, relatves, suppliers, that are intertwined with the borrower of NPL - the bank is one debtor of the failed business.

mulit-trillion target 2 balances (with germany the one owed and pretty well every other country borrowing ro buy german products) show the extent of the "vendor financing" of the german conpanies pretending that selling to people that can't afford the product or serice is good business. it isn't. taking on debt is "begging" and so is the buyer of advertised products/services (to those that can't afford it).

Doom Porn Star's picture

" taking on debt is "begging"  "


One could also argue that vendor financing is a type of bribery and/or accounting legerdemain with implicit FedGOV and banking consortia backstopping..

Pretending to sell a product when in effect generating a loan on exorcise of an option to purchase overstock in effective liquidation.   Where is the profit margin of the producer generated -in production or in captured leveraged liquidation financing underwritten by third parties and/or governments?

We all saw how companies such as GE and GM, etc. were in effect bankrupt manufacturing shells with looted pensions floating on financing schemes when the FED and US Treasury had to bail out both and their vendors and constituencies in varous ways with TRILLION$ during the GFC.


Edit & Addendum Consideration:

Refundable prepayments for unrealized production = put option/zero coupon security instruments with an implicit underlying denomination value gamble.  

Pre-order 500,000 Teslas and then ask for a refunds on the units as you require the funds...

In effect a derivative bet on currency value, underlying asset demand, etc.

This strategy might be useful as an effective manner of hedging Tesla ( or suppliers or competitors, etc. ) long and short/collar, with the added possible value of a zero strike price and you arent locking to a hard expiry date....


Currency variances over time might make the above quite profitable to the savvy trader depending on curerency value fluctuations and/or the policy concerning conversions of deposit denominations available in refunds process...   LOL


ukipboy's picture

"since there is a banking union, one major bank fails means every bank fails"

The first part of that sentence is incorrect. There is no banking union in the Eurozone. Even the Germans saw that one coming and said "Nein". In any case the professors who first set up the AfD party (Alternative for Deutscheland) took the case to the German Constitutional Court in Karlsruhe and they ruled that a "transfer union" in which German taxpayers would send endless amounts of money to Greece and Italy would require a new German constitution. That is not even a remote possibility, especially in an election year. So NEIN. There is no transfer union and the German taxpayer is not obligated to bail out banks in the South of Europe.

However, contagions and bank runs are another subject. Once they start, they will take down the whole Eurozone in short order. Then we will see how many trillions Deutschebank has bet on derivatives.


Yen Cross's picture

   Screw  Brussles,

 You've gotta love  the synergy?

wildbad's picture

...the new slave system is not QUITE ready so they will have to keep buying everything that used to be considered an asset with their wholly invented, legal debt obligation on your shoulders until the new slave monetary system is ready for prime time.

we have all proven through complacency that they really are the masters of the universe.

as long as we allow them they will drive the car. everything you you for yourselves, your children, the future of your former country will be ashes in your mouths but, "keep believing".

we were suckered and are in too deep to accept the violence which is the only way out.

JOvite's picture

As usual, Chris, you've hit the nail on the head: the ability to freeze access to deposits is comfortably in line with the German need to enforce a centralised, single currency Europe. In effect, this is a message to outer countries of Europe - today that means Italy, Spain, Portugal - not Romania etc; we can, and will, do to you what we did to Greece if you are foolish enough to question the power of the 4th Reich. Certainly there is fear of failure of individual institutions, but that is manageable, at a cost to Germany. What is existential to Germany is the continued control of a centralised Europe under the EU Politburo. Any split, and the British are going to be punished (if it does not hurt German exports too much) for having the audacity to leave the EU.


Individual currencies act as a break on contagion, but also weaken the power of a single economy. Not a “Single Economy” meaning Europe, but a “Single” economy – Germany.

OpenThePodBayDoorHAL's picture

Not many people pay attention to the rates at which the Euro converted, the krauts got a very favorable deal because they were "the sick man of Europe"at the time. They in turn had given a very favorable deal to the E. Germans for their currency shortly before that.

Euro needs a reset to take into account the states of the constituents economies today. Oops, no can do. Deutscheland uber alles!

France, Italy, Spain should just say people can only spend Euros that were manufactured there (with the right serial numbers)

Doom and Dust's picture

Go on, short the euro then..

No? Thought so.

JerseyJoe's picture

Europeans can short the Euro by buying gold.  Given the reported $1T in NPLs, the reality is probably twice that.  So yeah, I would at least take out some golden insurance.   10% short if your whole life savings was left to a printed scam like the Euro might seem prudent.

silverer's picture

Good point. Because something huge has changed after 45 years. We have some "street vendors" called Brics, setting up some tents in front of the Fed and the whole western financial system. And WTF? Lookie, they're using GOLD! Oh, no! Something is going to happen to the dollar! Despite 45 years of control, it's about to have a very viable overseas competitor, so the manipulation and fraud that has kept it alive are about to have a lot less effect on controlling the coming disaster.

hooligan2009's picture

the three ugly sisters - euro, dollar and yen.

sterling is not cinderella, yet, either - maybe if there is another technological revolution that the UK invents, that is what libtard socialists are waiting for - a new tomorrow that takes care of the complete fuck up that has been made of today.

every country is a mortgage bank - same as it ever was when countries borrow the future to spend today on nothing that lasts and therefore has value.

Doom and Dust's picture

All of those central banks have converging balance sheets in absolute terms. I guess so nobody can tell who's uglier. But Japan has by far the smallest economy backing it.

Sterling is toast. Given the UK's private debt pile and structure Carney cannot raise rates because he'd risk mass defaults. But given the UK's trade deficit the pound can't keep sliding either because that would spur inflation, forcing his hand.


Manthong's picture


Maybe Carney should move to Israel or somewhere...

Bankers are fungible.

JerseyJoe's picture

I wonder if all the spending on rapeugees is "helping" europe's economy?   Must be. "Krudman's stimulus" - burn something down so you can re-build it.   It helps the economy damn-it.  (Taken to extremes so do wars - you rat faced idiot with an ignoble prize.)

Debugas's picture

Cash out and put the cash into safety deposit box.

That saved me once

But today even safety deposit box is not safe - in russia failing bank raided deposit boxes and customers found them empty and unable to prove there was something in them

nmewn's picture

Now thats what I call friendly, discrete, professional, personalized

"A note to all our loyal customers. You can be assured your money is completely safe here at ABC RussBank, you just won't know where it is! Thats security comrades!

You will also be happy to know there are no fees ever charged for this service, its absolutely Faaarrreee! just for being our loyal customer!"

I would have made a great marketer ;-)

Doom Porn Star's picture

'Gift Cards' are implicitly Vendor specific currency/product options products.   The use is widespread.

Most people do not understand that they are actually utilizing derivatives products* every day.


*See my post above containing a brief discussion of pre-payement and refund for Tesla products as another example..

Let it Go's picture

Euro-zone banks are neither "fixed" or the system healthy. The Greek economy remains an issue. Italy is deeply in debt, unemployment is high in many countries especially among the youth, and refugees continue to flood in adding more stress to an overburdened social system. Now the people of both France and Germany are indicating they may have had enough. The article below delves into these problems.

Doom and Dust's picture

Are you saying currency traders are wrong?

You and Bruce could make a killing here!

Last of the Middle Class's picture

Think "unsecured loan" when you deposit money in a bank. Always have some spare cash on hand, or at least gold and silver for barter when the next financial "lockdown" comes. In order to protect investments all banks will lock down all cash movement that in any way might jeopardize their involvement in the financial markets and the profits they reap there. They will shut of money flow to individuals and institutions in a heartbeat if their massive derivatives and corporate welfare QE is threatened. That, in essence, is the problem the Fed has now. How to wean the crack addict banks off of "free cash" The answer is the same for an addict addicted to methamphetamine. All at once, or not at all. There are too many words in the English language with multiple interpretations that can be used to justify "just one more hit" of QE. We're seeing that now with Janet and Mario. Word gravy for the masses designed to sooth the devastating effect QE has had on main street. And here I do mean, corporate welfare, Obamacare and the newly minted democratic propaganda entitlement line "alternative minimum income". All of these are based on easy money and it's influence on good government that never should have happened in the first place.

silverer's picture

Right on.

"Think "unsecured loan" when you deposit money in a bank."

The way I remember Dodd-Frank, it's more like:

"Think "unsecured loan" when you invest money in a bank."

Yes. They call it an "investment". Gee, you can lose your investment, just like with the rest of the games in the Wall St. casino. Imagine that!

Byte Me's picture

....yawn..., slept badly again, just must do something about the lumpy matress...

Wake me up when the 'new normal' alters..

(rolls over - muffled chinkling heard)



Haitian Snackout's picture

I'm reminded of the Tepco fudge factor where one always adds at least one zero to any number they report.

silverer's picture

That's why the elites want to get their program moving for world control, before the whole plan falls apart. Europe is finished. Those "laborers" they imported will not work, except to change Europe into musloidville. That's where the energy will go, and the immigrants will be successful, because they are getting help from the EU to do it.

GunnerySgtHartman's picture

And yet the sheeple still trust the banks ... tsk, tsk, tsk.

CatsPaw's picture

Old news...

Yes, its all a paper castle and there is a hurricane coming.

And those at the top tower keep telling us its a good idea to buy a room in that castle.

Its been like that since 2000.

MaxDemon's picture

Commercial Banks have 3 (and only 3) functions:

1) facilitate transactions between people and businesses (really between accounts).  If this stops the economy stops immediately. To do this everyone has to have an account, and most have to have some money in a bank.

2) consolidate savings and lend them out, ie make savings productive. If this stops the economy stops growing and will stall soon.

3) manage the risks with 1 and 2. If this fails the economy goes broke, usually very quickly.

everything else is window dressing or marketing.


Most banks and regulators in most developed countries have so badly screwed up #3 that #2 almost stopped, and now #1 is threatened.  The regulators are trying to stop the use of cash as a means to force people into the banks, but now threaten them if they do use the banks.  This kind of stupid behavior causes economies to fall.

Not My Real Name's picture

From the article: "The lack of a robust national deposit insurance function to protect retail depositors leaves an entire society vulnerable to banks runs and debt deflation."

I think the author means a "national deposit insurance ruse" -- like the FDIC in the US that has $25 billion backing $9 trillion in eligible deposits.


OpenThePodBayDoorHAL's picture

They also have a $500B LOC from the Treasury but your point stands

Mimir's picture

The background for the nonsense in the article: an Estonia proposals (present Presidency of the Euiropean Union) that has been discussed the 13th of July but without any conclusion - member states on how best to precede to prevent future bank runs.

The rest is wisful thinking accross the seas !!!!

Consuelo's picture





I was just thinking...   There's been the usual slew of China crash & burn/imminent-doom stories on a daily basis, but it's been sorta quiet on the European Union-going-down-in-flames-tomorrow banter.   Relief rally I guess...  


malek's picture

"there remains nearly €1 trillion in bad loans within the European banking system. This represents 6.7% of the EU economy, according to a report and action plan considered by EU finance ministers earlier this month. That compares with non-performing loans (NPL) ratios in the US and Japan of 1.7 per cent and 1.6 per cent of gross domestic product, respectively."

Do you truly believe those three numbers and that they are comparable, i.e. measured using the same methods?

I don't believe them for 3 seconds: for starters how many bad RE loans (residential and commercial) do US banks value at par on their books, which weren't paid for months or years?