Tuesday, January 21, 2014


The focus this week started off with the Europeans triggered no doubt by the DeutscheBank announcement of their setting aside of almost $1billion in reserves for anticipated credit losses and an overall loss for the last quarter of a billion Euros admitting to what everyone already knew that the state of Euro banking stinks.  Why this came as a shock to many of the talking heads out there I cannot understand nor do I understand the sudden outpouring of admiration for Ben Bernanke for having saved American banking as opposed to the ECB which did…well, what did it do or for that matter, not do.

The truth remains that the trouble with Euro banking remains of what we have been speaking for almost three years now; Europe.  Eurobanks are far more an extension of their representative nations and it's policies  than any U.S. bank at anytime in history.  The politics of European banking is intertwined with that of the individual states; the ownership is intertwined either through politics, cross-board memberships or directly through direct ownership of shares either by the national governments or, as most notably as in the case of Germany, by individual German states.  Irrespective of share ownership, Eurobanks are not privately owned and managed entities; never have been, probably never will be.  Their ability to act with the decisiveness and speed of their American counterparts is sorely lacking.

I don't care what one's views on American banks might be, it is difficult not to marvel as to what has been accomplished over the last five years.  Readers of these pages will know of of my views regarding Citibank but to reiterate this is an institution that arguably was in the worst shape by any measurement of the 6 largest U.S. institutions over the last 5 years.  In that time, if they have accomplished nothing more, they have shed nearly $1 Trillion of either non-core or distressed assets in one of the most remarkable restructurings in financial history.  No European institution has come close to such an achievement or the achievements of the system overall.  With help?  Of course, but the restructure of the American financial system has been a brutally focused effort that, because of political and structural restraints Over There never could have been achieved.  The announcement from DeutscheBank is certain to be the first of many across the continent and all will have one thing in common: they should all have been made earlier but could not have been because of the political implications of the manner and to whom credit was extended.  In the case of DeutscheBank, in the end the rug proved too small for the sweepings; so it will be with others.

It can be argued that American institutions were forced to act in an aggressive manner because of the aggressiveness of the regulators and to a certain extent that is true. And, as we have mentioned, the EU has tended to back away from a more aggressive regulatory posture especially in the area of capital adequacy, which going forward in less disturbing times may prove to be a highly competitive advantage against American Institutions.  But this has been the case because Europe, even with the creation of the EU, has never experienced the emergence of a true common capital market, preferring instead to allow the allocation of capital to national banking systems which of course, in the end, come under national political control.  Unavailable to EU banks are the risk takers that are prepared--at a price--to enable Citibank to dispose of unwanted or highly risky assets in such a remarkable manner and the bond and equity markets whose depth and innovation allowed the recapitalization of the American financial system from a point of collapse to the rather robust situation in which we find ourselves.

There is clearly more to this story that will play out over the course of this year.  I, for one, am not sure that the Euros are prepared to fully deal with the problem of their institutions even at this late date.  Surely they would prefer to push the tough decisions into the future as is always their wont, and pure political considerations may prevent a full reckoning on an across the EU basis.  I think, however, we have reached a turning point when everyone now, more or less, understands what a mess this has been and still is.  And that may not be a bad place to be.

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