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Illustration: Ron Borrensen |
Napoleon’s retreat from Moscow in 1812 proved withdrawal can be as deadly as invasion. It is a lesson not lost on European banks today as they beat a retreat from international markets, downsize businesses and shed risk-weighted assets, seven years after the global crisis.
An over-banked industry is saddled with up to €1 trillion of non-performing loans and razor-thin net interest margins. Lenders have diminished risk appetite and operational capacity to build fee and commission income. Meanwhile, US banks continue to win market share, taking 41% of investment banking revenue from European clients in the year to mid March.
But prolonged stagnation is the relatively good news. The bad news is that chances of a new banking crisis are still very real.
In the first two months of 2016 European banks were engulfed in a market crash threatening the global economic recovery. Eurozone banking stocks fell by a quarter, while US bank shares fell just 10%. On February 11, the iTraxx Europe subordinated financials index hit 315 basis points, a level not seen since the 2013 Cyprus crisis. Meanwhile, the primary market for additional tier-1 bonds (also known as contingent convertible, or CoCo, instruments) seized up, with UBS paying a heavy premium to re-open the market in mid March.