“Europe’s bank sector has grown too big and may need to shrink, possibly through mergers or failures (...) many banks in the euro area do not earn their cost of capital.” In other words, they are zombie banks, bankrupt and only kept alive by the liquidity flowing from the ECB. “It seems that there are too many banks competing for customers. (...) There is a good chance that the banking sector will indeed shrink.”
Who makes such incendiary statements, which would panic millions of savers throughout Europe if they were broadcast by the mainstream media? Some doom and gloom prophet seeking fame? Some editorialist exaggerating a bit to make some noise and be heard? No, not at all. On the contrary, this is coming from a low-profile individual, very well informed, occupying a very high institutional position: Danièle Nouy, who is none other than the person in charge of banking supervision at the European Central Bank.
This woman in charge of controlling the European banks’ financial situation – who has direct access to their accounts, since she’s working at the ECB – is quietly announcing that the banking sector is over-sized and that we must expect mergers and failures... Since bank “failures”, un-forcibly or without losses, are a very rare occurrence, here one must read the word “default”, much gloomier.
These perfectly explicit statements coming from the best possible source help us understand why the BRRD and the Sapin Law 2 were put in place: Those bankruptcies must be organised in such a way as to limit damage on the banking system and the economy. The BRRD, as a reminder, allows a failing bank to use its clients’ bank accounts, whereas the Sapin Law 2 allows the freezing of life insurance accounts. The project of freezing bank accounts is part of the same logic. These new regulations are put in place knowingly – the European banking sector will have to go through a major restructuration, many zombie banks will fail, the savers will have to pay, and the taxpayers will be “asked” to contribute... fair warning to all.
To wit, September 29, Crédit Agricole announced the buyout of three Italian credit unions for 130 million euro. Prior to that, it was the Italy's Interbank Deposit Protection Fund (FITD) that used to finance 3 billion euro of bad debts for those banks. Here the saver has been spared, but the whole of the Italian banking system – through the guarantee fund – has now several billion euro or extra debt, which is not too reassuring. By the way, isn’t it a marvellous idea to buy Italian banks... Evidently, the French bank didn’t learn from the catastrophic experience with Greece. One should not be talking about restructuration here, but rather about kicking the can down the road with debt.
Mergers, restructuration and bankruptcies will increase in the coming years in Europe – this will be accomplished with debt, but it will also bring its lot of crying and tears. Decidedly, we are living an exciting time...
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.