Investment Finance and the
Recovery
Lisboa September 4-5, 2014
Financing the recovery in Europe:
How to resolve the post crisis EU banking sector
fragmentation?
Lars Nyberg
The ”Financial trilemma in Europe”
(Schoenmaker)
• 3 objectives
• Financial stability
• Integration
• Sovereignty
• Any par of objectives can be
achieved, but never all
three
Financial stability
Integration
Sovereignty
The pre-crisis approach
• Harmonisation
• MoUs
• Colleges
• Few binding
arrangements
sovereignty at the
expense of stability (and
integration)
Financial stability
Integration
Sovereignty
The EU Way - the third option
• A decentralized structure
but a strengthened ”core”:
• Improve co-ordination
• Strengthen harmonization
• Some centralization of powers
Integration
Financial stability
Sovereignty
EU’s response to de Larosière
European
Systemic Risk
Board
(ESRB)
• Frankfurt (at ECB)
European
Banking
Authority
(EBA)
• London
European
Securities and
Markets
Authority
(ESMA)
• Paris
European Insurance
and Occupational
Pensions Authority
(EIOPA)
• Frankfurt
What we got…
Two trends:
Financial stability
The banking union
- to some
Integration
Fragmentation and
ringfencing – to
others
Sovereignty
Foreign Bank Ownership
Hit by Credit Withdrawals?
• SEE countries – yes. Funding through mother banks that
got into trouble and week domestic banks
• The Baltics – no. Funding through mothers but strong
mothers
• South American Countries – no. Largely domestic funding
of foreign banks
Strong owners of subsidiaries or independent
funding helped against fragmentation
EU Bank Lending
€12 tr
10%
5%
€2.4 trilion
€11 tr
0%
-5%
€10 tr
-10%
-15%
€9 tr
-20%
2008
2009
2010
€bn
2011
2012
Change in %
2013
Demand or Supply driven?
• Clearly, demand for credit has fallen as a consequence of the
crisis
• Large borrowers move into the bond market
• But there is evidence that small and medium sized business
have trouble in getting finance
• Where foreign banks have left and domestic banks are week,
this is particularly serious. Again the SEE countries.
The Banking Sector will shrink
• Before the crisis, the financial sectors became too big relative
to the real sectors. Easy to borrow, easy to lend
• Many banks lent freely with poor credit analysis and got into
trouble as NPLs increased
• Europe was (and still is) overbanked!
• Banking systems will have to shrink
And further…
• New regulations make capital and liquidity more expensive to
banks (Basel III)
• Banks will have to charge more to customers, particularly for
loans with longer duration
• Funding costs have increased
• In the US, banks handle only ¼ of the credit market. In Europe
it is ¾.
• Non-bank institutions outside the regulatory structure will
provide credit to corporate customers. The “shadow” market
will grow in importance. But why shadow?
• Banking will shrink
Funding cost for EU Banks have increased
600 bps
500 bps
400 bps
300 bps
200 bps
100 bps
iTRAXX Credit default swap spread index
2012
2011
2010
2009
2008
2007
2006
2005
2004
0 bps
US and EU Financial Markets
€9bn
€8bn
€7bn
€8.4 trilion
11%
10%
€5.8
trilion
Banks
€6bn
High Yield Market
19%
€5bn
53%
Insurance Companies
€4bn
€3bn
Non-bank Lenders
78%
€2bn
27%
€1bn
€0bn
US
EU
The technological
development…
•
•
•
•
The customer move to internet banking is rapid
The use of cards is expanding and the use of cash is falling
Investment in technology will continue to increase
Bank branches do different things and they need less people
• Bank employment will shrink
What to do?
A non-comprehensive list
• Clean up the banks!!!!
• Realize that we are on the move from bank to market finance.
The banking sector will never return to what it was
• Encourage other transparent sources of credit like “Direct
Lending”. Everything is not “grey”. Even securitisation is useful
• Make EBA think twice (e.g. when requiring immediate
impairments of credits to restructured companies)
• Support the Banking Union! It will not cure everything, but it
will help
• Do not forget the non-EU and the non opt-in countries
particularly hit by fragmentation. This is where “ring-fencing”
will start to undermine the financial integration
Clean up the banks!
• The US way:
•
•
•
•
Acknowledge the holes in bank balance sheets
Allow bankruptcies (also personal) when necessary
Handle the bankruptcies quickly
Fill the holes with new capital and start again
• The EU (or Japanese) way
•
•
•
•
•
Acknowledge as little of the holes as possible
Avoid closing even small banks
Let corporate bankruptcy proceedings go on for years
Do not recapitalize banks enough to attain credibility
Enjoy your recession for ten years or more
The BAMC of Slovenia
The BAMC Loan Portfolio
NPL portfolio by strategy
2519
NPL portfolio by difficulty
# of companies
# of companies
1918
992
786
395
602
628
356
296
86
332 Recovery
94 Restructuring
101 Difficult
212 Medium
113 Simple
Transfer price NLB&NKBM € million
Transfer price NLB&NKBM € million
Gross exposure NLB&NKBM € million
Gross exposure NLB&NKBM € million
Why AMCs?
• Well established way to clean the balance sheets of banks and
thus provide a prerequisite for growth
• Clean balance sheets increase transparency, reduce
uncertainty and help restore credibility
• Help management and board to focus forward on new lending
instead of looking backwards at the old NPLs
• Work out of NPLs often requires different skills than in banks.
Bankers should not run AMCs – and AMC people should not
run banks. Maybe controversial – but true!
• Should stop market expectations of falling prices
Thank you
“An acceptable
decision-making
process” according
to the press-release