BANK CHIEFS ARE in
denial. So are many of the bankers whom they employ, who earn
their living advising other financial institutions on how to
Throughout the summer,
all the way through to late September, the public markets for
bank debt were firmly shut. There were, literally, no
Bankers attribute this to
a combination of factors. The huge uncertainty surrounding the
eurozone was the main one. That had forced spreads out so wide
that most banks were not prepared to pay them.
As the funding freeze
spread, bank treasurers tried to convince Euromoney
that their institutions wouldnt be too badly affected.
They had pre-funded their 2011 needs in the first half of the
year when the markets were much more receptive. They remained
active in secured markets and in private placements.
The euphoric welcome to a
handful of short-dated FRNs and longer-term bond deals by
national champions reopening the new-issue market in October
suggested that those bankers sang-froid was only for
endless meetings across Europe throughout last month, it
became clear that Europes banks would need to raise at
least another 100 billion in capital. The market will
need to be open to more than a select few if the private sector
is to pick up the shortfall, which it almost certainly will
Amid all this confusion,
it might be that something even more profound is going on that
bank executives, while busy urging politicians to come up with
a truly convincing plan for sovereign finances that will shore
up their banks own assets, are contriving to ignore.
The bank funding markets
face a crisis that goes far beyond the problems of Greek
haircuts. Banks dont just need to adapt to new capital
levels, they need to get used to much higher costs of that
capital if its even available.
Both debt and equity
investors, by refusing to fund banks and by selling banks
shares down to such discounts, are going to force, perhaps
quite quickly now, a substantial structural change in the
banking industry of a scale that regulators have timidly hinted
at phasing in over many years.
Bankers now talk of
deleveraging and balance-sheet shrinkage. But what is about to
unfold is more akin to a new Glass-Steagall: an investor-forced
break-up of large, complex, universal banks into much smaller
and more specialized institutions.
Bankers are worse
"The only people even
more guilty of not getting it than the politicians are the
bankers," says an adviser to the senior executives at a select
number of large European financial institutions. "Bankers
always complain about European politicians always being behind
the curve and only ever coming up with the barest minimum plan
to stave off the latest phase of crisis...but the bankers
themselves are even worse."
This adviser has been
frustrated by his clients unwillingness to see larger
investor concerns about the banking industry that extend beyond
the immediate worry over exposure to toxic sovereign debt. He
says: "Debt investors have identified business models that are
unsustainable and decided to stop funding them. Equity
investors, similarly, are correctly pricing in forced dilution
that could come in the next few weeks as European banks that
are poorly managed and following the wrong business models are
This is where his
frustration comes in. He reels off a string of suggestions he
has made to bank clients to exit business and raise capital
that they have rejected in the past few months in the name of
retaining their long-term strategy to run diverse business
models that supposedly sustain banks by maintaining a capacity
to derive earnings from different sources.
One rejected a suggestion
to enter negotiations to sell off its asset management
division, another to dispose of a banking subsidiary in a
volatile emerging market that the client bank decided it should
retain because it might be a big source of profits in five or
10 years time.
Banks, he suggests,
dont have the luxury of time and would be well advised to
raise capital as best they can rather than have governments
forcibly inject it on punitive terms.
"Bankers complain that
shareholders are unfairly undervaluing their shares at 0.6
times book or 0.4 times book just because of fear over
sovereign risk. But when you really drill down through
individual businesses, inside many of these banks there are
clear signs of creeping devaluation. Businesses that the banks
seem to think should be worth 4 billion are in fact
probably worth only half that or less if recession takes hold.
Shareholders are right."