The Phaserl


Small Banks Must Go: Megabank-Meister Draghi

by Wolf Richter, Wolf Street:

Pushing to control a larger slice of the EU’s financial pie.

There are plenty of reasons to be worried about the state of Europe these days, but if one had to choose one thing above all others, it would be the gaping disconnect between reality and senior European policy makers’ willful misperception of reality.

A perfect case in point was a speech given in Frankfurt by ECB president Mario Draghi. He was addressing a conference of the European Systemic Risk Board (ERSB), an organization created in 2010 by the European Commission to warn about and mitigate systemic financial risks in Europe.

When Small Is Evil

During his address Draghi discussed what he saw as the biggest threats to Europe’s financial system. Just as you’d expect from any senior central banker worth his or her salt, he did not point to the most obvious risk: the zombifying banks at the very top of the financial food chain — the same banks that coincidentally constitute the ECB’s number-one constituency and whose balance sheets are still filled to the rafters with toxic assets dating back to even before the last major crisis, in 2008. By now, virtually all of these banks are fully dependent on the never-ending and ever-growing welfare assistance provided by the ECB.

Nor did Draghi mention the excessive complexity and interconnectedness of the banking system, routinely fingered as potential causes of the next global financial crisis. Nor for that matter did he mention the destructive side effects of the ECB’s negative interest rate policy (NIRP), which – besides sacrificing millions of savers and retirees via their pension funds on the altar of rampant debt creation and completely undermining the crucial micro-economic role played by capital formation – is making it difficult for Europe’s largest banks to turn a meaningful profit.

No, for Draghi, the biggest financial problem in Europe these days is that it is over-banked. “Over-capacity in some national banking sectors, and the ensuing intensity of competition, exacerbates this squeeze on margins,” he said.

Put simply, there’s just too much competition from the thousands of smaller banks that are crowding out the profits for the big banks.

Consolidation and Concentration

The solution is clear: lots and lots of cross-border mergers that will finally convert Europe into a genuine single financial market, while also enhancing the concentration and consolidation of the sector. This is not the first time that the ECB has called for the two “Cs”. As we warned over two years ago, it was one of the crowning goals of European banking union.

One big problem Draghi faces in achieving this vision is that the ECB only has control over Europe’s 130 biggest banks. The other 6,000 or so smaller institutions — the local and regional savings banks and cooperative lenders that by and large continue to offer some semblance of financial service to local communities and businesses — are currently still under the supervision of national regulators.

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