The ECB And Bank Stocks
As I wrote on a number of occasions, the European banks are in a lot of trouble. They are substantially under capitalized and there is little that can be done to hide that. The default rates across the Eurozone are going up as the faltering economy due to the lock downs takes hold.
A year ago, the repo market totally froze up necessitating the United States Federal Reserve stepping in and providing liquidity. This was precipitated by the fact that United States banks did not trust the European banks enough to lend to them, even overnight.
Ultimately, this was the Fed's way of keeping interest rates down because, if the overnight market saw a skyrocketing of prices, it would filter through to other aspects of the credit markets.
Here we are a year later and things are only getting worse. The ECB spent more than a decade easing. They even took interest rates negative in 2014 in an effort to kickstart the economy across the zone. It failed.
Now they are stuck with the prospect of trying to maintain the illusion that things are going well. Markets depend a great deal on confidence. When that goes, things can tank very quickly. If this happens to the banking system, the problems will be felt on a global scale.
Equities tend not to influence the credit markets directly. Thus, the price of banking stocks usually has little impact on larger economic questions. In this instance, that is not the case. A collapse in the price of the EU banking stocks would mean that we could see serious effects elsewhere.
This is why the ECB is talking about buying stocks, while not specifically saying "banking stocks". However, this is the intent so they can maintain the illusion that the banks are meeting the capitalization.
The Eurozone banking system is still mired in debt that was on the books during the last financial crisis. Since they did not write it down, the banks were expected to move on as was. This has shown itself to be a total failure.
When we compare it to the U.S. banking system, we see a sharp contrast. While few were willing to advance the banks what was needed, the government did step in. Of course, in return, there were tight reins placed upon those institutions which they all screamed about. Nevertheless, it did improve the capitalization of the banks and give them strengthened balance sheets.
Hence the ECB is stuck with having to buy the bank stocks simply because nobody else will. Investors across the continent are aware that the banks are not in good shape.
The only question is the backstopping. At this point, the ECB is going to have to step in to keep the illusion that things are okay with the banking system.
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