The world economy is going through a moment of great uncertainty, with multiple factors that could alter global financial balance. Geopolitical tensions, the persistence of inflation and high levels of private and public debt configure a panorama in which financial markets and banking sector could be subjected to a new resistance test. In this context, the risks not only come from the traditional banking system, but also from a growing financial sector in the shadow, less regulated and not yet subject to a large -cutting credit crisis. This is a great challenge for central bankers and governments, since if a recession arrives, the ‘outbreak’ of these shadow giants can have a difficult impact to calculate today. On these challenges and the prospects for the financial system, Jérémie Boudinetresponsible for financial debt and subordinates of Credit Mutuel Asset Management, analyzes in this interview for electionomista.es The threats that lurk to the markets and the role that banks will play in the coming months.
Do you think there is a risk of a financial crisis similar to that of 2008 if the US enters recession? What could be the main triggers of such an event?
No crisis resembles another, although we do see some worrying signs that could have discouraging consequences. The regional banking crisis that caused the bankruptcy of several banks in early 2023 (Silicon Valley Bank, Signature Bank …) should have promoted a strengthening of financial supervision. However, so far no significant measures have been applied and the new US administration seems to lean for deregulation. There are still more than 4,000 credit entities, mostly capitalized and subject to little regulation.
As if that were not enough, there is a huge increase in private credit and those for its acronym in English (obligations guaranteed by loans), as banks reduce some of their usual financing activities to companies. From the world financial crisis they have not been submitted to a true recession and credit crisis. We are seeing a deterioration of loans for cars and credit cards, which could get worse in a recession scenario. The big banks should be well positioned, since they are properly capitalized and well managed, but we continue to distrust the smallest banking institutions.
What do you think is the greatest risk for financial markets in the coming months and years? Could geopolitical tensions, inflationary pressures or debt of companies become important threats?
We have not experienced a true economic recession accompanied by a credit crisis in the last ten years, since public and private debt have served, to some extent, as a shield to the economy. With the rise of private credit and its titulization through clos, we see some threats from the “banking sector in the shadow”, a much less regulated sector than the banking and very opaque system. Many institutional buyers, such as insurance companies and asset managers, now invest in this market, which has not yet suffered a true credit crisis. The Covid-19 crises and the inflation of 2022 were too ephemeral to trigger a true credit crisis. This means that, if a deep and lasting recession arrived, we could enter into unknown territory.
What explains the resistance of Spanish banks despite the ECB relaxation cycle?
Macroeconomic trends remain much better in Spain than in other eurozone countries, which allows local banks to continue increasing their loans. Interest income has begun to slow down, but they are still very satisfactory, especially in Spanish banks that also operate outside Spain. The provisions for insolvencies are also very low, thanks to the sanitation of the balances, and, in addition, the efficiency of costs has improved in the retail bank networks. Spanish banks are reaping the benefits of having accumulated huge reserves over the last ten years to reinforce their prudential solvency and liquidity ratios, in addition to having faced their delinquent loans, which cost them so much to eliminate.
Do you think it is feasible that the BBVA OPA on Banco Sabadell ends up materializing?
It is very possible, yes, since in Spain there is less political interference in the banking system than in other countries, although there is still, especially in Catalonia. Regulators also consider that larger banks are in a solid position and can lend more, thanks to greater cost efficiency. Spain has had an extensive experience of merger and successful bank acquisitions in the last 15 years, and this has played an important role in the restructuring of the sector, which means that neither regulators and governments have a negative vision of future transactions. The case of BBVA and Sabadell is, of course, more complex, taking into account the size and overlap of both entities, but there are still many possibilities for an agreement to be reached.
We see a trend in the banking sector towards the creation of great entities. Will we continue to see this type of corporate movements in the coming years?
I think so, and this is so throughout Europe. After the great financial crisis, Basel III rules forced banks to significantly reduce their leverage, while reinforcing their solvency ratios and maintained their sanitized balances. Along with much lower types and high costs, due to oversized retail networks, the banks had no choice but to survive. In our opinion, banks have become comparable to insurance companies, which are strongly overcapitized and adopt a prudent approach when maintaining or investing in assets that have many possibilities of losing value or causing financial instability. Therefore, size has become the main mechanism to achieve reasonable profitability, while maintaining diversified activities to fall on recessions.
Is this a risk that banks investors should take into account? Have we not learned anything from ‘too big to fall’? Where is the limit of these corporate movements?
The narrative of the “too great to break” has changed completely with respect to its original approach. Before, regulators and governments thought that smaller banks would be easier to liquidate, but it is not true. For example, in the United States, in 2023, contagion spread rapidly due to the lack of trust and triggered a massive withdrawal of deposits (“Bank Run”). The largest banks are considered safer, since they are more capitalized than smaller entities and subject to greater prudential supervision.
The problem does not lie in the size of a bank, but in its risk controls and its prudential ratios. Credit Suisse was a world systemic bank, but has disappeared without causing any systemic problem, thanks to the strength of UBS and other large comparable European banks. There is a natural limit to the size of the banks, which is determined by the antitrust regulations, but also by the regulatory norms, which force the largest banks to have more capital. Therefore, from a certain point, the growth of large banks offers increasingly limited benefits.
How do you expect mergers and acquisitions to finance (debt issuance, dividend cuts, business sale …)?
Fusion and acquisitions work quite differently for banks than for non -financial companies. They must be financed with capital surpluses, potentially together with capital extensions, since regulators would not approve an operation that weakened the strength of both entities. Business sales are quite unusual today, but banks usually have cost synergies, through computer systems and retail networks.
Where does the risk that mergers and acquisitions affect the profitability of the business of European banks?
Every time I see with more suspicion the recent mergers and acquisition operations, especially in Italy, where banks seem to be in a hurry to announce this type of movements before becoming a purchase objective. As expected that the types will fall in Europe in the near future, it can be expected that the profitability of the banks will decrease to some extent. Consequently, some CEO are eager to offer a new narrative to their shareholders, trying to become larger. Thus, the risk to profitability lies in unrealistic synergy and growth objectives, since banks remain a cyclical sector that operates in mature markets in Europe.
Do you see feasible cross -border corporate movements, between banks from different EU countries or even between euro zone banks and outside it?
The main obstacle to cross -border mergers and acquisitions is politics. Governments and politicians are open to the idea that their local banks acquire other foreigners, but not vice versa. The opposition of German politicians to the fact that Italian Bank Unicredit approached Commerzbank was a clear example of this. Cross -border mergers and acquisitions are more complicated to carry out, since they require independent financing and solvency reserves in each country, but they are definitely not impossible … provided that local powers do not prevent it.
Within Europe, what country will probably the most prone to mergers and acquisitions of national banks, and why?
In our opinion, Italy should be the most active country in mergers and acquisitions over the next few years, since it has even more than a hundred credit entities. Germany also has several hundred banks, but a large part of them are publicly owned, which prevents any significant movement of this type of operations.
We also see mergers and acquisitions in the asset management sector. Do you see transatlantic operations in this area more feasible?
The asset management industry is also subject to several winds against – the fierce competition of passive investments and high regulatory costs – that are forcing agents to consolidate. Banks are also playing an important role, since BNP Paribas is buying Axa IM1 through its Cardif Insurance Division, like the Italian Bank Banco BPM is buying Anima, while Natixis IM and Generali are joining. Banks are buying asset managers through their insurance branch, since it is less expensive from the point of view of prudential solvency, and that puts disadvantage “pure” insurance, who cannot do the same. Consolidation is easier to make a cross -border scale here, since political impediments are usually less important, but should not involve asset managers from outside Europe, due to regulation differences and political instability and political instability
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