Despite massive reserves, the banks are in an increasingly fragile situation. The European Central Bank is intervening and making banks choose between voluntary mergers now or compulsory ones in 2021. Will this be enough to avoid a financial crisis? Don’t they have any other option than to go through a new wave of branch closures and layoffs?
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The banks’ profit comes mainly from three sources: intermediation, that is, taking savings and lending them at a margin; investment in industrial portfolios which return a dividend; and speculation in markets which produce short-term speculative gains.
To cushion the perennial tendency towards the crisis, the Central Bank has been carrying out a long period of very low interest rates that became negative from a certain point onwards. That meant reducing margins among other things because with very low or negative rates the bank cannot remunerate deposits without losing money, so it charges for them. But if a bank charges too much depositors will take the money to any cheaper option, the famous I would rather keep it under the mattress. So it has a cap. To compensate for the loss of margins the answer is to sell more credits. But fully opening the tap doesn’t usually work out either: the risks of default escalate more than proportionally and any convulsions can ruin the balance sheet.
And that is exactly what happened. Spanish banks granted more than one million moratoriums on mortgage and consumer loans to their customers until the end of July, with a total outstanding balance that exceeds 45 billion Euros.
Non-performing loans in companies have been on the rise, but for the time being, the application of the state guarantee program has allowed banks to increase credits without risking their own viability. But even that is far from clear. The companies’ debt has skyrocketed since March, many were already very much in debt, and the Bank of Spain is beginning to say that the government must facilitate the restructuring of credit… that is, it is telling the government to lend a hand so that the aquittances that are coming don’t cost the banks so much and that they can leave the companies alive instead of closing them down to recover part of the lost loans.
The fact is that business debt has grown by 20% in the last year, and without an upturn in consumption and sales, debt is inevitably a time bomb. Hence the pressure from finance capital to avoid new lockdowns and the pressure from the central bank for the government not to spend a penny on zombie companies. Resources must be saved for whatever may be sustainable.
Not to mention alternative sources of income. The national champions that were the favorites of the industrial portfolios of the banks are in the doldrums. And the ECB already held a line to force banks to divest themselves of industrial holdings to reduce risk. As for the short term speculative game, volatility has skyrocketed with the pandemic, and the banks have not even been able to defend the value of their own shares.
Risks, losses… and mergers
Faced with this scenario, banks have protected themselves in two ways. Firstly, by increasing its own debt with the ECB in order to obtain liquidity with which to face greater risks. And above all, by increasing reserves to the point of declaring losses in order to reduce risks. The ECB, which had asked not to distribute dividends, was frightened by the implicit valuation of risks and began to make insinuations about the viability of the current banks and then hurriedly reminded everyone that the CET1 (an indicator of capital quality) had not been seriously eroded during the first months of the pandemic.
The discourse continued to be that in order to increase profitability one could only reduce costs and that in order to do this one had to increase economic scale with mergers between banks that, by means of dismissals, would give some relief to profitability. But that was only part of the truth.
The persistent spectre of a new financial crisis
The spectre of a financial crisis is still present. Not only in Spain, where it is raised as an argument against new lockdowns by the banks’ research services. In Germany, business arrears are on the rise and its banking system comes from a series of interventions that came close to covert nationalization in an effort by the state to keep it afloat.
The point is that, everywhere and particularly in Spain, to get national capital out of trouble as a whole,the government and big Spanish capital need to increase the level of risk taken by banks… without actually wiping them out.
So they have directly jumped onto a dangerous tightrope. On the one hand, the bet is doubled: they see the need so clear and the urgency so pressing that they made bank mergers a central part of the king’s discourse in the event of the employer’s association (CEOE) that marked the consecration of the new roadmap of Spanish capital in the face of the crisis. On the other hand, Bank of Spain and the Ministry of Economy worked all summer to create a security mattress for the banking sector/strong>. But when you double a bet and at the same time you double the insurance with which you cover your losses, one cannot say that the foreseeable result is the same. In case the bet is lost, the result will be even more catastrophic.