Banking problems are coming home to roost in Europe. The Financial Times dedicates its weekend editorial once again to Deutsche Bank, and wonders whether – beyond the contingent difficulties – the bank still has a functioning ('viable') business model. Its business base in Germany is laid on a foundation of clay, German businesses are flush with cash and need no credit. Investment banking activities are not profitable and have left a heavy legacy of lawsuits with regulators (American, European ones hardly bother big players) and games of uncertain valuation.
The German authorities, meanwhile, have realized that the path to public support is barred by the threat of the bail in – thanks to the unreasonably hard line imposed in the bailouts of Italian banks. Instead of being the tool for crisis management, the Single Resolution Mechanism has become a straitjacket that deprives the authorities of the minimum tools to manage crises in an orderly manner. The possibility of a bail-in puts investors on the run and aggravates mistrust, precluding recourse to the market to raise capital.
Meanwhile in Basel, other knots are coming home to roost. The system of internal risk assessment models, invented at the end of the XNUMXs by the big European banks to reduce capital ratios, has come to an end, the Americans denounce its opaqueness and ask for its revision. Right thing, of course, but to do so now – as the entire European banking system sinks into a systemic crisis of mistrust – is suicidal. A serious reflection would be needed on ways to guide the European banking system - therefore, not only the Italian one - out of the shallows where it fell, through its own faults but also through serious errors by the regulators. The fact that they are mostly unable to see what is happening and that the European Commission is going through an unprecedented legitimacy crisis makes the situation more difficult.
