Quick read: European banks' retail-shareholder divorce

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Long years of losses and scandals, and now new regulation, spell a break-up with European banks’ bedrock of support in their retail investors, who have often been their own clients. Read on for a guide to Dominic O’Neill’s story on their split and the deep implications for Europe’s financial sector.

Dec18Cover 408px1. A tale of two capital raisings: what Italy shows about the future of banks’ investors

The crucial rights issues of two Italian mid-tier banks over the past year show the direction of European banks’ traditional reliance on retail investors. This could be a turning point, as political scandals are making it much harder for even Italian banks to rely on their depositors for capital.

“We worked very much in the local constituency… leveraging the traditional channels” – Paolo Fiorentino

2. Four million Santander shareholders: why retail matters for Europe’s biggest banks

Retail shareholders account for big parts of even the big banks in Europe, particularly in Spain. While their presence is welcomed, it can result in problems, which can be costly to resolve.

“It’s a circular reference. If the share price falls, retail investors might not differentiate between their deposits and shares" – Alastair Ryan, Bank of America Merrill Lynch

3. Regulators tighten the screw: how marketing shares and sub-debt to retail is getting a lot harder

As Europe tries to secure its bail-in framework, supervisors are applying Mifid II with particular zeal to banks’ marketing of their own securities to retail clients. Some are even calling for a total ban on banks using their retail branch networks to raise either equity or subordinated debt.

“It’s something you could take into account when you look at how could manage the resolution of the bank: who has the sub-debt, what will be the consequences. If you think it could be an issue for resolvability, you should ask for more capital” – Robert Ophèle, Autorité des Marchés Financiers

4. Threat of catastrophe: can banks avoid conflicts of interest?

Self-placements can come naturally to universal banking groups, but retail investors have often seriously underestimated the risk in investing in their banks’ securities – and mutual banks might find it even harder to do without them.

“If retail investors knew what institutional investors knew, they wouldn’t invest in their banks” – Spanish investor relations official

5. Sleeping partners: how a remunerative shareholder democracy proved a sham

While there are some convincing financial reasons for owning a bank, the sense of ownership involved has proved all too illusory for retail shareholders – with dangerous consequences.

“If your shareholder base is very dispersed, it’s easier to take risk not everyone understands what’s going on. It gives management a free hand” – Pierre-Henri Conac, University of Luxembourg

6. Downward path: why the shift to institutions is self-reinforcing

Institutional investors are shifting banks away from the dividends – and the branches – their local shareholders can no longer love. As a younger generation may not replace them, banks’ retail shareholders in banks are aging rapidly.

“Institutional investors have progressively brought in more volatility in the last few years, as hedge funds looking for alpha have increased their weight” – Alberto Coll, Banco Sabadell