Deutsche Bank’s unappetising cocos: Discomforting brew

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Investors are reassessing yet another complicated financial instrument

WHEN governments bailed out banks during the financial crisis, they tended to insist that shareholders suffer big losses. Most bondholders, however, got off scot-free. In theory, bondholders should have lost money too—but working out just how bankrupt the banks were, apportioning the losses and risking contagion among bondholders elsewhere seemed too risky to contemplate as the financial system was seizing up.
Regulators have since pushed banks to fund their activities with less debt and more loss-absorbing capital. The simplest form of capital is equity—the money raised by selling shares or retaining profits. But trimming dividends or increasing the number of shares reduces the value of the existing ones. So bankers and regulators dreamt up a new financial instrument that would act like debt, thus sparing shareholders dilution, unless capital was urgently needed. These …

European banks: Borrowed time

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It has been a traumatic week for European banks. Their problems run deepest in Italy

FOR those who worry that a repeat of the crisis of 2007-08 is imminent, this week brought fresh omens. Shares of big banks tumbled; despite a mid-week rally, American lenders are down by 19% this year, European ones by 24% (see article). The cost of insuring banks’ debts against default rose sharply, especially in Europe. The boss of Deutsche Bank felt obliged to declare that the institution he runs is “absolutely rock solid”; Germany’s finance minister professed to have no concerns (thereby adding to the concerns). This is not 2008: big banks are not about to topple. But there are reasons to worry, and many of them converge on one country.
Start with the better news. Banks are more strongly capitalised than they were. Even in Europe, where lenders have been slower than their …

Markets lose faith: This isn’t 2008, but it isn’t great either

SO FAR, 2016 has been something of a disaster around global markets. Equity and commodity prices have been hammered. Yields on safe government bonds are plumbing extraordinarily low levels. Investors seem to be terrified. But of what?Recession talk has increased, but real economic data in most countries don’t look especially bad (though they are backward looking, and enough market pessimism can at any rate turn self-fulfilling). Some suspect the mess is a reaction to troubles in the European banking system. European bank shares are tumbling, ginning up bad memories of the financial crisis. But while European banks have their problems (and could create many more if the European economy sank back into serious recession) it does not look like the cause of current market jitters. European banks are better capitalised and have access to massive amounts of liquidity thanks to the European Central Bank. This is not a situation like 2008, when markets doubted banks’ solvency, banks struggled to fund themselves, and credit markets collapsed.What about the widespread adoption by central banks of negative interest rates? On January 29th the Bank of Japan joined the negative interest rate club, and on February 11th the Swedish Riksbank reduced its policy rate deeper into negative territory. Negative rates, it is argued, squeeze bank margins, threatening profitability and …

Falling bank shares: A tempest of fear

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European banks are in the eye of a new financial storm

IF THE start of the year has been desperate for the world’s stockmarkets, it has been downright disastrous for shares in banks. Financial stocks are down by 19% in America. The declines have been even steeper elsewhere. Japanese banks’ shares have plunged by 36% since January 1st; Italian banks’ by 31% and Greek banks’ by a horrifying 60% (see chart). The fall in the overall European banking index of 24% has brought it close to the lows it plumbed in the summer of 2012, when the euro zone seemed on the verge of disintegration until Mario Draghi, the president of the European Central Bank (ECB), promised to do “whatever it takes” to save it.

The distress in Europe encompasses big banks as well as smaller ones. It has affected behemoths within the euro area such as Société Générale and Deutsche Bank …

Markets and economics: Falling bank shares: a bad omen?

ANOTHER worry has been added to the long list plaguing equity markets this year. Bank shares have been falling fast, particularly those in Europe, which in morning trading, were down 22% so far this year. The collapse of 2007 and 2008 was all about the banking sector. If European banks are in trouble, then comparisons with that period are bound to mount; earlier worries, notably the slowdown in Chinese growth and the fall in commodity prices, had more parallels with the Asian crisis of 1997-98.A number of factors are hurting bank shares. First, the sluggish performance of European economies over several years means there are worries about bad debts on bank balance sheets; Heartwood Investment Management reckons that 16.7% of Italian bank loans are non-performing, against a European average of 5.6%. Italian banks have been amongst the hardest hit. More generally, however, the recent results season for Europe’s banks was disappointing with the CreditSights research team describing them as weakened by a mix of restructuring charges, goodwill writedowns, lower trading revenues and impairmentsSecond, there are specific worries elsewhere. Deustche Bank’s shares and bonds have been hit by worries about its ability to pay coupons on its $5 billion or so in convertible capital bonds (cocos). Such securities were issued as part of new bail-in rules designed to make the …