More Comments on Banking Mess – Part 2

In the article below, we learnt that strong banks are profitable banks, and that the current Finnish banking supervisor, who is moving to Frankfurt for a larger similar EU job, appears happy with the good results of EU’s banking supervision. But closer examination reveals deep weaknesses in European banking where all the big banks are deeply connected…

Let’s look at the news about two large European banks that have been planning to merge CommerzBank and UniCredit Bank. The banks must be doing really well because they pay their top people very well:

UniCredit’s new CEO, Mr. Orcel will receive up to €7.5 million and Commerzbank’s former CEO, Mr. Zielke, was paid €3.3 million. His successor, Mr. Knof, will receive €1.7 million plus substantial perks and bonuses!

As you would have read in the article below, we are told that banks are in good shape by the departing Finnish banking supervisor. That may be the case in Finland at this moment in time, but Finnish banks have large exposures to banks in Europe and the USA, in addition to the domestic housing mortgage markets, that in turn are exposed to higher interest rates on floating rate loans.

First, let’s look at the proposed merger between Commerzbank and UniCredit. You would think that the normal logic for a merger is that a healthy bank (UniCredit) is buying weaker bank (Commerzbank) to exploit big reductions in administration and personnel costs. The markets commonly use share prices as indicators of health, and when you look at them you find that two sick banks will probably make an even bigger sick bank!

There is little evidence that current and former CEO’s have much idea about safe and profitable banking, even though their salaries and bonuses are huge! Mr Orcel came from a senior position at the big Swiss bank called UBS, and their share price is listed below…

And just look at the biggest French, Swiss and other German banks’ share price histories.

Things are better across the ocean, but  they have a big market with a bigger and more dynamic financial market where poor performance is pruned back quickly.

Banking in Europe is in a really poor state and supervisors need to buckle up… the relationship between banks and supervisors is too close in Europe and it is quite evident that more skills and tough love is needed.

Then there is the question of inflation and higher interest rates. Finnish banks and home buyers have a huge exposure on higher interest rates because Finnish banks refuse to offer long fixed rate housing loans to borrowers even though the Euro capital markets offer great possibilities to fix interest rates for long periods. Almost all the home loans are based on short term interest rates. Higher interest rates on these big loans will mean more defaults and the three biggest banks look exposed with huge market shares and with a huge exposures to the real estate market on the balance sheets.

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