BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Weaker European Bank Earnings Should Matter To The U.S.

Following
This article is more than 4 years old.

Getty

A slew of European banks is reporting earnings starting tomorrow, April 24 until May 3. A weaker European economy, trade tensions, low European interest rates, and Brexit uncertainty are all key factors adversely impacting European banks.

Unfortunately, many of European banks’ woes are of their own making. A host of regulatory and legal fines and ongoing money laundering investigations of several banks do not bode well for European earnings.  According to a very detailed Moody’s Investors Services report, FAQ: Money laundering and economic sanction breaches remain costly threats,' “European banks were fined over $16 billion from 2012 to 2018 related to money laundering and trade sanction breaches.”  Thus far, US regulators have imposed more than 75% of the fines, and they are not done yet. “The US is now investigating Danske Bank, which admitted some failures in the anti-money laundering (AML) controls of its Estonia branch. Swedbank is also being investigated for some weak AML controls at Baltic operations, and preliminary investigations are ongoing at other Nordic banks. Italy's central bank has also found shortcomings in AML processes of ING Italy.”  And as I wrote a few weeks ago, Deutsche Bank is also being investigated in the U.S. for alleged fraud and money laundering.

European regulators are also imposing larger penalties than previously; in September 2018, Dutch regulators fined ING Groep $915 million. Moody’s points out that “Although most fines have been lower than the affected banks' annual pretax earnings, they remain a costly threat, posing financial, operational, and reputational risks.”

Moody's Investors Services

A significant challenge for banks is that fines may not emerge until several years after the infringement. Additionally, not only will bank earnings be pressured from these fines, banks will have to spend even more money on technology, compliance, and audit functions in order to demonstrate to regulators that they are serious about reducing their recidivism.  Unfortunately, they are also likely to have to cut jobs both in Europe and the U.S. to cope with all these fines and a slowing European economy.

Moody's Investors Services

However, this should be no time for schadenfreude on the part of U.S. financial institutions. Both U.S. banks and non-banks are very interconnected to European banks. According to the Federal Financial Examinations Council’s Country Lending Survey, American banks’ total on-balance sheet exposures are presently about $17 trillion dollars of which unsurprisingly, the vast majority (77%) are to U.S. persons, financial institutions and companies. Of U.S. banks’ foreign exposures of $3.9 trillion, 41% are to European banks. Four of American banks’ largest ten foreign exposures are European.

Data Source: FFIEC Fourth Quarter 2018.

Within the U.S., the largest European intermediate holding companies by far is HSBC. The data are for these banks’ asset size only in the U.S.  These banks are far larger than many of our domestic institutions and they provide a wide range of financial transactions both to banks, non-bank financial institutions, corporations, municipalities, and American persons across the U.S.

Data Source: Federal Reserve

The Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity shows that in the fourth quarater of 2018, a number of European banks are in the top 25 derivatives and spot foreign exchange market participants in the U.S. These European banks are counterparties to the largest U.S. banks, non-bank financial institutions, and corporations.  For example, Credit Suisse, Barclays, Deutsche Bank, BNP Paribas, HSBC, and Credit Agricole are in the top twenty leveraged loan underwriters in the U.S.

Office of the Comptroller of the Currency

More than ever, European and U.S. bank regulators should increase their supervision of European banks both abroad and here in the U.S. It is a big mistake for U.S. legislators and lobbyists to be pushing for weaker bank requirements and regulations for European banks. U.S. taxpayers have had to bailout European banks during the 2008 crisis. There is absolutely no reason that we should be subsidizing private sector institutions when those funds would be better used for the many education, healthcare, and infrastructure projects needed in the U.S.

 

Follow me on LinkedInCheck out my website