O tempora, o mores1
In the spring of 2007, New Century Financial Corp., a major US subprime mortgage lender, announced it would stop accepting loan applications. This would precipitate a death spiral from which it would never escape. In February 2007, HSBC recorded a significant increase in loan impairment provisions and mortgage lending came to a halt, thus triggering the subprime crisis. It took just a few weeks for the shockwave to reach Europe. By August 2007, BNP froze three dynamic money market funds. Soon after, newspaper front pages showed depositors forming long lines outside Northern Rock branches to withdraw their savings…
10 years later, Banco Popular – Spain’s 6th largest bank was placed in liquidation. Still embroiled in problems stemming from pre-crisis real estate speculation, the Spanish lending institution was hit by a large-scale run on deposits. After determining the bank’s liquidity problems to be insoluble, the European Central Bank (ECB) declared that the “point of non-viability” had been reached. With the creation of the European Banking Union, this automatically triggered the “resolution” mechanism for the distressed bank. Shareholders and subordinated bondholders immediately lost 100% of their capital whereas depositors were saved with guarantees from Banco Santander who bought the bank for one euro.
Far from precipitating a wave of panic as in 2008 or 2011, this announcement – followed a few days later by the rescue (this time, public) of two severely distressed Italian banks, Veneto Banca and Banca Popolare di Vicenza, was, to the contrary, applauded by all commentators. They commended this exemplary resolution made possible by the new European regulation that saves the depositor and public finances while imposing the burden of payment on certain number of bondholders and shareholders.
Following years of regulatory headwinds and complicated financial conditions, Banco Popular’s resolution is even contributing to a significant increase in European banking sector valuations. Risk premiums for senior European bank debt are back up to the level of early 20072, whereas bank stock indexes have rebounded by more than 75% since the Brexit vote one year ago.
It took 10 years and a major monetary crisis for Europe to develop satisfactory solutions to the weaknesses of its multinational banking system. Ten years of crisis is a long time from a day-to-day perspective though without a doubt the price to pay for building a solid foundation for a banking sector to ensure a dynamic European economy.
Visionary Oscar Wilde already declared in his own day “Good resolutions are simply checks that men draw on a bank where they have no account.” Let us hope that the good resolutions of today are now based on stronger foundations… A “return to normal” would not represent a sufficient reward for the patience of shareholders and citizens. It is more urgent to prepare for the future than correct the past.
Didier Le Menestrel