7 Reasons Why European Banks Are In Trouble

Authored by Philipp Bagus via The Mises Institute,

While the euro crisis seems far away as all Eurozone countries ran government deficits below 3 percent of GDP, there is one problem for the euro that quietly keeps growing: the unresolved banking crisis. And this is not a small problem.

The Eurosystems´and euro banks´ balance sheets totaled €30 trillion in January 2018, that is about 291 percent of GDP.

European banks are in trouble for several reasons.

First, banking regulation has become tighter after the financial crisis. As a consequence regulatory and compliance costs have rise substantially. Today banks have to fulfill demands by national authorities, the European Banking Authority, the Single Supervisory Mechanism, the European Securities and Markets Authority and the national central banks. Being at a staggering 4% of total revenue currently, compliance costs are expected to rise to 10% of total revenue until 2022.

Second, there are risks hidden in banks´ balance sheets. That there is something fishy in European banks´assets can quickly be detected when comparing banks market capitalization with their book value. Most European banks have price-to-book ratios below 1. German Commerzbank´s price-to-book ratio stands at 0.49, Deutsche Bank´s is at 0.36, Italian UniCredit´s at 0.23, Greek Piraeus Bank at 0.14, and Greek Alpha Bank at 0.34.

With a price-to-book ratio below 1, buying a bank at the current prices and liquidating its assets at book value, an investor could make profits. Why are investors not doing that? Simply, because they do not believe in the book value of the banks´assets. Assets are too optimistically valued in the eyes of market participants. Considering that the equity ratio (equity divided by balance sheet total) of the Euro banking sector is at only 8.3%, a down valuation of assets could quickly evaporate equity.

Third, low interest rates have contributed to increasing asset prices. Stocks and bond prices have increased due to the monetary policy of the ECB, thereby leading to accounting profits for banks. Monetary policy has, thereby, artificially propped up banking profits during the last years.

Fourth, according to the ECB non-performing loans (NPLs), i.e. loans where borrowers have fallen behind in their payments, amount to €759 bn., that is 30% of the banks´ equity.

Fifth, more trouble for banks lies ahead. Due to artificially low interest rates, insolvency rates have fallen. In Germany in 2003, 39,470 companies (1.36% of existing companies) became insolvent. By 2017 insolvencies had fallen to 20,200 companies (0.62%).

Insolvency Rate in Germany 2003-2017, by %

Source: Creditreform.de

Companies that otherwise would have had to close, can survive due to interest rates close to zero. Their survival is not without cost as they suck up resources that could be used in other projects. Every year of the ECB´s zero interest rate policy 10,000s of bankruptcies are postponed adding to a growing stock of zombie companies. The zombie companies contribute to the anemic growth because they mal use resources that could be use more productively in other lines of production. Once interest rates increase rapidly these zombie companies will come to the roost and insolvency rates will return to more normal levels leading to problems for banks.

Sixth, lower interest rates have posed severe problems to banks´net interest margin. The passive, the transformation and the credit margin of banks have fallen. The passive margin results from investing deposits of bank clients in the overnight interbank market. Banks could earn traditionally a margin this way but not in a world of negative interbank rates. The transformation margin results from maturity transformation, when a bank borrows short-term from a client and lends long-term to another client. With a flattened yield curve, this transformation yields less than it normally would. Borrowing at 0% in order to lend long term at 0% is not profitable. Moreover, when banks lend long term at very low interest rates and short-term rates start to increase, margins fall further.

The credit margin results from the risk of lending. Banks try to compensate the falling passive and transformation margin by assuming higher credit risks. The competition of banks in this field drives down the credit margin as well. Thus the zero interest rate policy of the ECB has cannibalized traditional bank profitability.

Seventh, banks in the Eurozone are still connected closely to their government. As of January 2018, Eurozone banks held €3.536 bn. Government debt on their books which amounts to 13% of their balance sheet total. When in the next recession, the sovereign debt crisis looms again banks can expect losses on their sovereign debt portfolio.

When interest rates increase in the future banks will be confronted with several difficulties.

First, non-performing loans will increase and zombie companies will go bust.

Second, banks' long term low interest rate loans will become more difficult to refinance profitably.

Third, asset prices will fall leading to losses. Government may get into trouble.

As a result of these losses, banks will be forced to restrict credits as their equity shrinks. Ironically, the ECB´s zero interest rate policy designed to promote credit expansion will finally lead to a credit contraction. There will be a severe recession and a fall in the money supply. The crisis will not only endanger the banking system but the euro as such, because troubled Eurozone government will try to recapitalize their banks through a monetization of newly issued debts.


Fireman Tue, 05/22/2018 - 05:02 Permalink

Deutsche Bank stuffed full of toxic derivative shit. Unleash the tsunami and blame the Germans. Works every time and no doubt STASI "Erika" will be more than happy to go along with her anglozionazis plan.

Singelguy Pearson365 Tue, 05/22/2018 - 07:09 Permalink

It is no secret that the Europeans love their bureaucracy. For example the EU has 1200 rules on the importation of bananas! 10% compliance cost is insane. I would agree that total deregulation is going to the other extreme, but it is fair to say that reducing regulations by 50% is a good thing for the economy. 

In reply to by Pearson365

Last of the Mi… Pearson365 Tue, 05/22/2018 - 08:16 Permalink

Zactly what I thought when I saw the BS about compliance costs. Clearly written by a banker not being able to sweep all the money out of the bank every night and play the stock market.

As long as banks pool money for investments outside the community they are just pass through agencies with no real connection to the area and people the serve. They become dependent upon fees instead of income generated and paid back to the investors as interest and the whole system becomes a sham.

They did it to themselves.

In reply to by Pearson365

Offthebeach Last of the Mi… Tue, 05/22/2018 - 10:42 Permalink

Heavy regulations , large legal staffs, expensive outside compliance audits, benefit big banks and wipe out small local banks that know their customers risks.    National banks might have 10% compliance costs( passed on to customers) but for a small, knowledgeable regional or special industry bank the compliance costs might be 20-30%.  

So big regulation, big beurocracy , big gov go hand in hand in iron glove together.


In reply to by Last of the Mi…

MoonSun Tue, 05/22/2018 - 05:07 Permalink

If market capitalization were much higher than assets at book value, you would have said European banks are currently too expensive. Because it is the other way around, even under heavy regulation, you say nobody believes its books.

I don't know what the current situation is, but don't make people believe US banks are any different than European banks.

whatsupdoc Tue, 05/22/2018 - 05:11 Permalink

Nope.  Bank doom porn doesn't cut it.

There aint no shit and there aint no fan.

Some commentators just don't get it.

We've had more than a decade of this waaah waaah and they aint broke yet.

Let me know when the charts change 25% - and I'll call it a mild rise or fall.

A 3% change in any one chart or index is not a crash OK?


Byte Me RudeDog2 Tue, 05/22/2018 - 08:22 Permalink

You must be one of our well educated ex-colonial 'Amerikans', with such a well imbued knowledge of geography..

For other 'passing tourists' who are having map difficulties (but have a geographical IQ superiour to the CNN graphics dept ) allow me to bring some KY and clarify penetrative "inconsistencies".

The big dong to the north of the map is in actual fact the newly incorporated Caliphate of Swedenistan. This actually marks a first for Europe in transitioning a Christian Monarchy directly over to an Islamic Terror Entity.

The small dildo like object to the south of "New Sweden" is in fact the fine country of Denemark (their preferred spelling)



The North Sea now has new exploration opportunities - especially in the Carboniferous strata and other declines now available since MOST of the United Kingdom has now relocated to the (oil rich) environs of The Falklands.

Don't tell britbob.


But 'seriously' -- Northern Ireland gets "attached" to Eire?

Good luck there...

In reply to by RudeDog2

Golden Showers Tue, 05/22/2018 - 05:26 Permalink

Young Padawan; There is no money.

One of the presuppositions of life is there is a thing called money. Can you find it on the periodic table? Do you think that is a science you think you know? Can you give me any evidence of "money"? What is "money"?

A Pink Floyd ballad?

Can I perform a test on something called money and understand it's properties? Shit, we know more about the fucking stars in galaxies far far away than what we know about "money".

Is it the cotton fibre content of a dollar bill? or the plasticity of a Euro? Is it physical paper or binary data? Does money tell you it is money or is it stamped with an impramatur and a valuation on order in series?

Money is a re-presentation of something, but it is not tangible. If money is intangible like the soul, who can judge it's worth? Money. Monkey... Value, wealth... whatever.

Show me something and give me evidence that there is a phenomon that exists called money. And you can't fucking do it. If Gold is an element, Silver, platinum, iridium, what about helium? Oxygen? Neon? These are not money they are commodities.

There is no money. There's only excuses.

kellys_eye Golden Showers Tue, 05/22/2018 - 05:53 Permalink

...and what a better, safer, affordable place the world would be if people only realised this and acted to shut down the existing banking cartels.

Government-issued, debt-free cash - in a tangible form - would cure many of the worlds ills.

When I consider how much of all the 'money' I've ever earned has gone to the pockets of those that don't deserve it, it makes me weep.

In reply to by Golden Showers

MARDUKTA Tue, 05/22/2018 - 06:12 Permalink

Cmon, the real reason for these banks to be so fucked up is they are led by perverted panty-waist faggots who are sexually depraved and deprived, thus affecting their judgment.

hooligan2009 Tue, 05/22/2018 - 06:41 Permalink

germany's landesbanks used to make money on home mortgage lending.

from here: https://www.statista.com/statistics/615037/mortgage-interest-rate-europ…

german and french mortgage rates are around +1.7%, compared to the ECB's MRO/LTRO rates of zero and MINUS 0.4% since March 2016 on its deposit facility.

that makes for a margin of around 200 basis points above ECB rates - LIBOR rates are a lot higher than ECB rates.

here is some stuff that shows France and Germany housing stock is between 30-40% rented, with around one quarter of the entire housing stock secured by a mortgage.

interestingly, half of italy's houses are mortgage free, compared to just over 25% in france and germany.

looks like there is a massive opportunity to treat italian houses as atm's to boost the italian economy via consumption.



Davidduke2000 Tue, 05/22/2018 - 06:42 Permalink

start by looking at home first. american banks are bankrupt and have been bankrupt for 38 years since the savings and loans and what followed.

But it is easier to bash the road kill of the day.

buzzsaw99 Tue, 05/22/2018 - 06:44 Permalink

in what reality based world would NPLs be a problem for banks?  this is the new eCONoME, earnings don't matter, dodgy asset books don't matter.

zvzzt Tue, 05/22/2018 - 06:47 Permalink

You guys are sooo pessimistic. Our .gov friends had an excellent idea back in 2008-2010: strengthen the balance sheets with super reliable and A-grade government bonds (rated by top-notch .gov institutions), including bonds of PIGS. Don't worry about a thing: PIGS will always pay back debts and they'll never go over the 3% deficit rate mandated by ECB (after all, have they ever broken their word before?). All be just fine and dandy... Have some trust in our fine institutions such as the ECB.... 

(/sarc, for my own safety)



RudeDog2 Tue, 05/22/2018 - 07:15 Permalink

>Open a bank

>Immediately get a license to print 10x the money you started with

>Pay you & your buddies huge bonuses for a successful year

>Cry to .gov about "lack of liquidity," ask for "recapitalization"

Money_for_Nothing Tue, 05/22/2018 - 07:25 Permalink

I thought the approved recapitalization plan was bail-in? Has that been given up? I think the ECB expand the Mini-BoT idea to banks. Would allow NPL to be written off slowly.

silverer Tue, 05/22/2018 - 08:02 Permalink

Maybe if bank owners and CEOs didn't siphon hundreds of millions of dollars or euros in profits out of the system, the banks would be more sound. How many mortgage payers does it take to salary a CEO? I keep hearing some banks made "record profits". OK, so where did it go? Certainly didn't stay in the banks. These wanks make millions while depositors are hit for bail-ins. Bullshit. Take all your money out of the bank. Your money is not safe in the bank.

Quantify Chief Joesph Tue, 05/22/2018 - 08:28 Permalink

Actually America adopted the European banking ways. In 1913.

1694: The Year which Doomed the World's Economies
The government of King William III was in desperate need of money. When learning of this situation, a man named William Patterson put together a cartel of wealthy men, of which he was the leader. Patterson and cronies agreed to loan the King 1,200,000 pound sterling which would have been approximately 6 million dollars at 8% interest per annum on the condition that the king would grant 2 things:

1) He would grant Patterson and his associates a charter which would name them "The Bank of England," and

2) This bank shall have the "sole and exclusive right" to issue notes to the fullest extent of its capital.

The people were having a problem with their gold and silver coins of which the bankers quickly came to the rescue. The solution is aptly described by Professor Carroll Quigley in his book, Tragedy and Hope:

• ...for generations men had sought to avoid the one drawback of gold, its heaviness, by using pieces of paper to represent specific pieces of gold. Today we call such pieces of paper "gold certificates." Such a certificate entitled its bearer to exchange it for pieces of gold on demand, but in view of convenience of paper, only a small fraction of certificate holders ever did make such demands. It early became clear that gold need be held on hand only to the amount needed to cover the fraction of certificates likely to be presented for payment; accordingly the rest of the gold could be used for business purposes, or, what amounts to the same thing. A volume of certificates could be issued greater than the volume of gold reserved for payment....Such an excess volume of paper claims against reserves we now call bank notes. In effect, this creation of paper claims greater than the reserves available means that bankers were creating money out of nothing...

The King literally granted the Bank of England the legal right to print all the money that would be used in commerce by the people and the government. In other words the Bank of England became the sole money source of any currency that was used in English commerce by either the people or the government. If they needed more money, they simply printed it. It is said that by 1698 British government owed 16 X 10 to the 6 power pounds sterling to the Bank of England. Keep in mind this was only 4 years.

In reply to by Chief Joesph

shortonoil Tue, 05/22/2018 - 08:27 Permalink

A zero percent interest rate simply means that the present debt based system has failed. It has become incapable of pricing assets accurately enough so that the economy can function. Losers win and winners lose until their is no one remaining to keep the show going. The idea is to consume existing assets until there is nothing remaining. That's called monetization.

currency Tue, 05/22/2018 - 08:33 Permalink

The Global Financial system is going to have one big headache and for some time and Bail Ins are going to be what CB's and Gov'ts are going to insist on and Depositors are going to take a huge haircut and Bond and Equity holders kiss their investments good buy.

BankSurfyMan Tue, 05/22/2018 - 09:39 Permalink

Create more banks, brokerage firms, provide more derivatives and swaps, mortgage the future, never fail to hype the FIAT currency! Brainwash the masses. Visit Disney land and purchase a yacht! You are rich! WGAF'...

itstippy Tue, 05/22/2018 - 10:32 Permalink

"According to the ECB non-performing loans (NPLs), i.e. loans where borrowers have fallen behind in their payments, amount to €759 bn., that is 30% of the banks´ equity."

"As of January 2018, Eurozone banks held €3.536 bn. Government debt on their books which amounts to 13% of their balance sheet total."

I can't figure out these numbers.

Let it Go Tue, 05/22/2018 - 10:47 Permalink

While the US and the UK were mired in political chaos during 2017 the EU claimed it was experiencing improved economic conditions. It appears this did little to move Europe in the direction of implementing long-needed EU and eurozone reforms.

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. More on this subject in the article below.

 http://EU Banks Remain Massive Problem.html