Veritaseum founder, Reggie Middleton, has accurately called the banking crisis, European sovereign debt crisis, the housing & CRE crash as well as several major tech paradigm shifts over the last 10 years. Click graphic above for a video synopsis of his track record.
The 2008 financial crisis and ensuing recessions have resulted in crisis in the global banking sector. Borrowers’ inability to make pay back debt or even service debt due to an economic slowdown had hurt the banking system. Contrary to popular rhetoric, the European economy is still far away from recovery and so are the banks that are domiciled there. The sector is grappling with barrage of concerns including negative interest rates, elevated levels of NPL, China’s synthetic growth engine facing the real reality of a slowdown, the softening of apparently elevated oil prices and impending regulatory and litigation costs.
The big banks in Europe have witnessed major reshuffles in 2015 with new CEOs taking over at Barclays, Credit Suisse, Deutsche Bank, and Standard Chartered. In the same year, Deutsche Bank lost a record (as in the most, ever) €6.8 billion ($7.6 billion). Europe’s banking barometer, the Stoxx Europe 600 Banks Index recorded seven straight weeks of loss in 2016, its longest weekly losing stretch since 2008 – speaking of which…
The Impact of Rising NPLs
The economic slowdown left many European countries with high levels of NPLs. The corporate sector has a higher share of NPLs within which SMEs exhibit the greatest concentration of NPL. Notably SMEs contribute almost two-thirds of Europe’s output and employment, and are more reliant on bank financing than large firms who have access to the capital markets. While NPL level is very high in Europe, writeoff rates are too low, less than a quarter of that in the United States despite the fact that the US is actually increasing loan loss reserves—creating a buildup of impaired assets nestled and likely hidden in bank balance sheets.
High NPLs affect profitability as it requires banks to raise provisions, which lowers net income. This creates a perverse incentive for banks to hide non-performing assets through methods ranging from creative accounting mechanism to outright misrepresentation. Whether NPLs are reported accurately or not, they are still non-performing, hence they when carried on banks’ books they usually do not generate income streams comparable to performing assets. NPLs, net of provisions, may also tie up substantial amounts of capital due to higher risk weights on impaired assets. In addition, a deteriorating balance sheet raises a bank’s funding costs because of lower expected revenue streams and, hence, heightened risk perceptions on the part of investors. Together, these factors result in some combination of higher lending rates, reduced lending volumes, and increased risk aversion – all at a time when much of the EU faces recessionary and deflationary pressures from within and abroad.
The next installment of this report will delve into the nitty gritty of what’s going on. Here’s a hint: half of all of the loans that have been made in Cyprus are NPLs (non-performing loans). That means 50% (actually, it’s 49%) of the business that the banks have wrote half failed or are failing.
This is at a time when the ECB has pushed rates negative, and pushing it even more into the negative.
This is at a time when the EU area regions are entering recession. This is at a time shortly after the Cypriot banks have been bailed-in – taking the depositors money to recapitalize the banks in lieur of the bank investor’s money. Reference actual bank statements showing capital being confiscated.
Laiki Bank has offers details…
It’s not just Cyprus, either! Purchase the introduction to the report here for $25, directly through the blockchain. The follow-up reports will delve into individual bank situations and offer our team’s opinions of each.
This was all foretold 6 years ago…