Potential new banking crises are a concern in Europe


While the first days of the 2008 financial crisis are long gone, the large level of bad loans continues to be a drag on the European banking system and could spark new crises in the coming year, an analyst told CNBC.
Investors are currently focusing on the recapitalization process at the oldest lender in the world, the Italian Monte dei Paschi, which is set to become a template for how the rest of the Italian banking system can be overhauled. But, given that Italy is not the only EU country with high bad loans in banks' balance sheets, analysts are worried that further banking crisis will emerge in Europe.
"In the States, the economy hit the wall, people wrote off all the bad loans, they got on with it and the banks recapitalized and move forward," Howard Goldring, managing director at Delmore Asset Management told CNBC on Monday.

"This process in Europe is taking years because of refusal to face reality and I am just worried that there's going to be more of this over the next year or two, not just in Italy but in other places across Europe."

According to KPMG, the European banking sector has about 1.1 trillion euros ($1.2 trillion) in non-performing loans, almost three times as much compared to the U.S.
At the moment, all eyes are on Italy, which was recently forced to opt for a state intervention to Monte dei Paschi. The process is still ongoing, but it has renewed concerns that taxpayers' money will be always at the front of the cue to rescue ailing banks. 
 
"It's very difficult to solve a banking crisis just out of private capital… so finally we have a template for a solution, which is also funded by the taxpayer, which is probably not the best thing to do but sometimes it is the only thing you realistically can do," Francesco Castelli, fixed income portfolio manager at Banor Capital told CNBC on Monday. 
 
Initially, Monte dei Paschi was supposed to gather 5 billion euros ($5.24 billion) from private investors, but the bank's situation deteriorated due to a political crisis and investors were reluctant in stepping in. The Italian government has then been forced to intervene and protect the third largest lender.

"There will be a bit of money lost from subordinated bondholders, which will be converted into equity, but it's probably a fair price in order to get the thing moving," Castelli added.
The European Central Bank said that the weak situation of BMPS demands a capital injection of 8.8 billion euros ($9.22 billion). The Italian government needs to ensure that such capital intervention is compliant with EU state aid rules. 
 
One possible way to guarantee compliance with EU rules is to compensate retail investors for their losses.

In total, the Italian government has planned to support the country's banking system with 20 billion euros. Thus, the intervention to Monte Dei Paschi, which should start in two to three months, could set a precedent for the other banks. 
 
"This is going to be a template for the solution of the crisis and this is going to be a very interesting opportunity to shore up the finances of all the troubled banks in Italy," Costelli added.
 

Credit Suisse bosses slash their bonuses by 40% to head off revolt

Credit Suisse bosses have cut their bonuses by 40% in the hope of avoiding an embarrassing protest by shareholders and politicians at the bank’s annual meeting.

The bank’s executives, had proposed paying themselves bonuses totalling 78m Swiss francs (£62m) even though the Swiss bank lost SFr2.7bn last year and has been fined $5.3bn (£4.2bn) by the US authorities for its role in the subprime mortgage crisis.

Institutional investors and Swiss politicians had publicly criticised the bumper payouts – including a total of SFr12m for Thiam - and vowed to vote against the awards at the bank’s AGM later this month.

The bank, which had defended the planned bonuses as recently as Thursday, announced it was reducing the awards early on Friday morning. “I hope that this decision will alleviate some of the concerns expressed by some shareholders and will allow the executive team to continue to focus on the task at hand,” CEO said in a letter to investors published on the bank’s website. “My highest priority is to see through the turnaround of Credit Suisse which is under way.”

Three shareholder advisory services, including the influential Institutional Shareholder Service (ISS), had urged shareholders to vote down the pay awards. “Despite a second consecutive net loss, variable remuneration levels for the executive board remained high, including a SFr4.17m short-term incentive for the CEO,” said ISS, which advises more than 1,700 of the world’s biggest investors.

Shareholder votes on executive pay are binding in Switzerland. If Credit Suisse had lost the vote, it would have been the first major veto since the so-called “fat cat law” came into force four years ago and would serve as a major embarrassment for the bank.

“If corporate governance is correct and the company has worked well and has a good annual result, then yes, some of [the profits] should be distributed,” said Minder, who led a 2013 referendum resulting in the implementation of the binding shareholder vote on executive pay. “But if it worked badly, like Credit Suisse, then, dear me, nothing can be allowed to be paid out.”