Money laundering leaks, a resurgence of the pandemic, risks to China, exposure to the Turkish financial crisis, all at a negative interest rate environment that is toxic to banks.
By Nick Corbishley, for WOLF STREET:
The Stoxx 600 Banks Index, which covers major European banks, fell 5.7% on Monday, to close at 81.1, just a little above the multi-year low of 79 set in March. The last time before March that the index was below today’s level was in February 1988, during the sell-off that followed Black Monday in October 1987, when it too collapsed to 79. The index it has fallen 85% from its peak in May 2007, after quadrupling in the past 1
Not even the promise of greater consolidation in the sector, facilitated by gunshot mergers of large troubled banks with smaller troubled banks, did not stop the fall in European banking stocks. Three weeks ago, Spain’s third-largest lender, CaixaBank, announced plans to buy state-owned Bankia, with money largely provided by the state, to form what will be Spain’s largest national bank. The Spanish MSCI grew only slightly in response and is now lower than it was.
It wasn’t just banking stocks that had a tough day today. European equities overall fell 3.9% as concerns grow over a second wave of coronavirus. But the banks have been particularly hard hit.
One reason for the defeat was the publication of an International Consortium of Investigative Journalists report on credit institutions that had facilitated $ 2 trillion in suspicious transactions. HSBC, Deutsche Bank, Standard Chartered, JPMorgan Chase and Bank of New York Mellon were involved. In nearly two decades, the five banks have “grown rich[ed] themselves and their shareholders while facilitating the work of terrorists, kleptocrats and drug bosses, “the report said.
Here is an example of how the bank’s actions reacted:
- ING: -9.27%.
- Deutsche Bank: -8.76%
- BNP Paribas -6.37%
- Santander: -6.22%:
- Unicredit: -6.17%
- HSBC: -5.26%
Deutsche Bank appears to have facilitated more than half of the leaked $ 2 trillion in transactions, which were reported to the US government but rarely read by investigators, let alone the actions taken, according to Deutsche Welle. Experts said some banks treat suspicious activity reports (SARs) “like a kind of paper to get out of jail,” filing “numerous reports on the same customers, detailing their suspected crimes over the years welcome their business. . “
HSBC is alleged to have allowed WCM777, a particularly pernicious Ponzi scheme, to move more than $ 15 million despite the fact that the business was barred from operating in three states. The scam stole at least $ 80 million from investors, mainly Latin and Asian immigrants, while the owner of the company “used the plundered funds to buy two golf courses, a 7,000-square-foot mansion, a 39.8-foot diamond. karat and mineral rights in Sierra Leone. “
The latest allegations could further complicate Deutsche Bank and HSBC’s operations in the U.S. interest, the services provided by Jeffrey Epstein and his involvement in numerous money laundering scandals.
HSBC’s position is fragile, as it has already signed three deferred power of attorney agreements (DPAs), an official form of probation, with the United States Department of Justice over the past eight years. But patience is running out, especially after the bank’s decision in June to embrace the Chinese Communist Party’s crackdown on Hong Kong, which prompted US Secretary of State Mike Pompeo to accuse the bank of aiding “political repression” Chinese in Hong Kong.
HSBC’s relations with the CCP are also strained. No matter how much the bank bows to Beijing, it could still be sidelined as punishment for reporting Huawei to US authorities last year for violating US sanctions against Iran, which ultimately led to the arrest of the chief financial officer. of Huawei, Sabrina Meng Wanzhou, Canada. .
This weekend, new reports emerged that China could place the bank on the “untrustworthy entities” list, a punishment inflicted on foreign companies seen by the Chinese government as a compromise of national security. Given HSBC’s enormous dependence on the Chinese market, which together with Hong Kong accounts for the lion’s share of its profits, if this happens, however unthinkable it may seem, the impact on the lender would be enormous. Shares of HSBC have fallen 52% so far this year, to their lowest level since 1995.
Other banks have seen similar stellar performances this year, pushing the Stoxx 600 bank index down 43% this year:
- Santander (-59%) and BBVA (-58%)
- The French Société Générale (-63%).
- The Italian Intesa Sanpaolo (-32%), which recently took over its domestic rival UBI Banca;
- UBS of Switzerland (-17%) and Credit Suisse (-30%). They too are thinking of merging to create a European mega bank capable of competing with giant US credit institutions;
- Deutsche Bank (-3.5%), ironically the big European bank with the best performance this year, after the collapse of its shares last year, and Commerzbank (-29%). The shares of the two banks fell 94% and 99% from their respective peaks in 2007 and 2000.
Risks continue to accumulate for the European banking sector, which has never adequately recovered from the last two crises – the global financial crisis and the euro debt crisis – and has been chronically debilitated by the ECB’s increasingly aggressive monetary policy, pushing its benchmark rates and many bonds yield negative, with largely undesirable consequences for banks, such as canceling their interest margin and destroying their ability to generate a good profit.
The cycle of Europe’s doom – when shaky banks hold too much of their country’s shaky public debt, raising fear of contagion across the financial system if one of them stumbles – has actually deepened by € 210 billion since the beginning. of the pandemic, according to a new report from S&P.
Another risk that appears to be growing is the excessive exposure of some European banks, especially Spanish ones, to emerging economies in difficulty, including Turkey.
But the biggest risks are at home. Although Europe’s leave and tolerance programs have helped prevent pain, it cannot be put off forever.
To give banks some breathing room, the ECB has eased banks’ leverage requirements until next July. The ECB’s plan to keep the European banking system afloat is to push through a massive wave of consolidation that will eliminate many of the weaker and smaller banks and strengthen many of the larger banks, many of which are also weak.
“Before the Covid crisis, the need to adjust costs, eliminate excess capacity and restructure the banking sector was very important,” and the pandemic has intensified those needs, recently said Luis de Guindos, vice president of the ECB. Banks need to consolidate “quickly and urgently,” he said. The hope is that with less competition they will be able to survive in what for banks is an interest rate hostile environment created by the ECB. By Nick Corbishley, for WOLF STREET.
For Turkey, borrowing in dollars and euros was cheap until it was. To read… On Turkey’s financial health concerns, the lira drops to a new low, the cost of Turkish sovereign debt insurance nearly doubles
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