Stunted growth across European economies has been attracting global concern ever since the world financial crisis nine years ago. However, in recent weeks, these issues have condensed into a more specific worry about the ways in which misguided European policymakers may be negatively contributing to the economy's deterioration.
In a testament to the evolving market conditions, market watchers have recently focused their attentions on the activities of Deutsche Bank. Many watchers hold the bank's troubles to be symptomatic of the greater European financial crisis (NYSE: DB). CEO of Credit Suisse (NYSE: CS) Tidjane Thiam told Canberra Timesthat the European banking sector is still "not really investable"--a comment intended to apply to all banks, Continental and British alike. This includes Royal Bank of Scotland (NYSE: RBS), Barclays (NYSE: BCS), and Lloyds (NYSE: LYG).
In fact, commentators have identified the four key issues they hold accountable for the present economic climate in Europe:
The first issue is the problem of the zero interest rate environment. It is "virtually impossible" to generate profit in such environments, which makes rebuilding capital buffers exceedingly difficult. The margin of capital typically generated from maturity transformation has been eliminated, due to central banks' tendency to purchase "right along the yield curve" thus "flattening it down to virtually nothing." Investment banks (including Goldman Sachs [NYSE: GS]) have also been affected by these same issues, and many banks are struggling to pay their cost of capital (i.e. the opportunity cost associated with making certain investments.)
The second issue is the increasingly high standards of international capital regulatory policy. The most recent installment has been termed "Basel IV," according to the Canberra Times. These hard-to-meet new standards are a product of general fear, and policymakers' desire to regulate their way to safety. Yet critics maintain that they are ultimately "ill-conceived and discriminatory" because they issue more penalties to European banks than American banks. The regulators' own core mission is to impose an "output floor" that will make "easier capital requirements on risk weighted assets" increasingly impossible to request. Unsurprisingly, American regulators are highly supportive of this policy, as it does not really affect American banks.
The third issue is misconduct fines. Some commentators believe that the United States Department of Justice treats misconduct fines as "just another way of further taxing the banks" (and especially European ones), given how frequently they are used nowadays. Yet today's bank fines are more likely to be scaled according to the target institution's ability to pay---not the severity of their misdemeanors. This de-incentivizes potential investors from investing in those institutions. (Would-be investors fear that large percentages of their investments will be drained by the DOJ.) On the other hand, the DOJ hopefully claims that it will be able to obtain a sizable settlement involving Deutsche, Credit Suisse and Barclays before America's Election Day 2016.
The fourth issue is termed "the challenge of fintech" by the Canberra Times. "Fintech" is a portmanteau which combines the words "financial" and "technology." According to the website FintechWeekly, fintech seeks to provide financial services aided by software. Fintech also strives to "disrupt" existing and entrenched methods of managing finance which do not involve software.
Despite the immediacy of all four issues, optimistic commentators do not believe Deutsche Bank will be a repeat of Lehman Brothers. (After all, a German government bail-out under Angela Merkel will be possible under dire emergency.) Yet, as of now, Deutsche Bank's situation is unique for its lack of the "risk of fiscal contagion"--a rare blessing that was not present in previous episodes of the European banking crisis.
But, all things considered, the most probable (and most pessimistic) next steps will probably lead to further contractions from banks--which, in turn, will likely widen the impact-zone of the European financial crisis.