The European banking system, and the Italian one in particular, has not yet recovered from the serious crisis that exploded in the USA in 2008 and which then affected the entire West. Regulators are frantically trying to impose regulations aimed at reducing the risks that bank defaults can cause on the entire economic system. But they issue rules that sometimes appear contradictory and often of dubious effectiveness. In fact, it appears evident that in the current situation, banks which provide credit to customers are penalized more than those which operate on the securities market, including derivatives, as more capital is prescribed to those who extend more credit while less capital is needed for those banks that operate on derivatives.
A study presented yesterday at the Ugo La Malfa Foundation by the head of the Mediobanca research area, Gabriele Barbaresco, who for a few months has succeeded the historic R&D manager, Fulvio Coltorti, focuses on the situation of European banks compared to the American ones, highlighting the differences in composition of assets and liabilities between the two sides of the Atlantic, the different ways in which the difficulties of the crisis were tackled, as well as comparisons on management efficiency parameters.
The analysis is extremely detailed and sophisticated, but with some simplifications it can be summarized that the profitability of US banks is better than that of European credit institutes above all due to the different speed with which the former made the adjustments (write-down of bad loans , and personnel reorganization) so much so that today doubtful loans represent 35% of shareholders' equity in Europe and about 8% in the USA. In the decade preceding the crisis, the assets of the banks grew, but the financial ones (securities and derivatives) had a much higher growth rate than the credit ones, so as to profoundly change the structure of the balance sheet, especially in some large banks, with the result that the revenues came mostly from financial activities while those linked to the traditional lending activity decreased. Finally, US banks appear to have more capital and risk funds than European banks.
By applying this interesting analysis to the problems currently on the table, it is evident that the current regulatory system based on the various Basel agreements tends to penalize banks that have a lower leverage and that lend money to customers compared to those that operate on the financial markets with strong leverage (i.e. very high assets compared to its assets). Basically, the regulations do not differentiate between commercial banks and investment banks, and indeed in risk assessment there is a tendency to give more weight to credit risk than to market risk. The reason probably lies in the fact that while for the first there is a consolidated methodology, in the second case there are no reliable methods for assessing the degree of risk contained in the various types of derivatives, indeed perhaps no one, not even those who manufacture them, knows exactly what degree of risk is contained in the instrument that is issued.
Eventually there will be a need to put in place strong levees to insulate derivatives from ordinary corporate or consumer lending. Although many large banks are fiercely opposed to this type of separation which puts an end in practice to universal banking because they argue that all this financial activity is actually needed to be able to provide a more efficient service to customers and, on the other hand, to support the bank's structure itself with interesting revenues that traditional lending alone cannot guarantee. In short, in order to be able to give credit at the lowest possible rates, banks must also have an activity on the financial market and also grow in size to be able to enjoy all the necessary economies of scale. But mergers are discouraged by the regulatory authorities because there is a tendency to increase capital requirements for large system banks, while for small and medium-sized banks a consolidation phase appears necessary and is much desired by national supervisory authorities.
Mediobanca's study helps to understand what has really happened in recent years and in what situation we now find ourselves. The ECB's supervision of large banks, stress tests and the harmonization of resolution rules in Europe are a key step to unify the banking and financial markets. However, an excess of rules (especially if they contradict each other) does not facilitate the recovery of the credit activity, indeed continues to penalize those who have less financial leverage, and does not facilitate bankers to abandon their old speculative vices to return to the risky profession to lend money to businesses. I doubt that it would be a real boon for the real economy to switch from speculators to bureaucrats.
