Excellent piece on DB and banking sector risk by Martin Wolf in FT this week. The key points:

  • All banks are weak, but some banks are weaker than others. This is the chief lesson of the market turmoil surrounding Deutsche Bank. Yet there is also a host of further lessons: the approach taken to punishing banks for their failings is more like firing a blunderbuss than a rifle; and it is still hard to recapitalise banks without public money. Above all, more than nine years after the start of the global financial crisis, worries over the health of the financial system remain significant, especially in Europe. This should not be surprising. But it should be disturbing.
  • In sum, the problem of banks has not disappeared. A fundamental part of the danger is that these are inherently fragile institutions. It is also likely that the balance sheets they inherited from the excesses of the pre-crisis period are insufficiently profitable and so will need to shrink. Most important of all could be the impact of new information technologies and business models on the health of the historic banking industry, particularly given the damage done to its reputation for competence and probity. Many would add to all this the impact on profitability of central banks’ ultra-loose monetary policies.
  • A little while ago the focus was on the Italian banks. Today, it is on Deutsche Bank. In all probability, even the latter will not trigger a big crisis. But risks in banking remain. The solution is to ensure adequate capital at all times and, in its absence, sufficient bail-in-able debt. In the absence of either, banking remains an accident waiting to happen.

So in the end, we are structurally more or less back where we were back in 2006, except that a lot of regulators have pocketed billions in fines without really altering the overall sector risk profile.

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Posted by Carlos Alvarenga

Carlos Alvarenga is the Executive Director of World 50 ThinkLabs and an Adjunct Professor at the University of Maryland's Smith School of Business.

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