The question of governance among eurozone banks
is firmly back on the agenda. The UK has introduced a degree of segregation
between banking businesses, while since the 1st of January 2016, Europe
has set a maximum guarantee for deposits in current bank accounts, in the event
of the bankruptcy of a financial institution, at EUR 100k.
This question has become even more pressing since
some Italian banks unhesitatingly filed for bankruptcy in December 2015 to protect
their depositors from the risk of being unable to recoup their sight deposits,
although this event attracted little media attention during the turbulent
year-end period.
The question is also all the more sensitive as not
all European banks segregate (separate) assets that they hold on behalf of
clients from their own assets. France is one of the rare countries in which
assets owned by banks’ clients (UCITS, physical securities, etc.) remain the
property of the clients and not the property of the bank where the assets are
held. For example, during the 2008 crisis, UCITS deposited at Lehman brothers
London disappeared when the bank went bankrupt, whereas this scenario would not
have been possible in France.
The question is all the more pertinent given
that clients rarely examine the balance-sheet of the bank in which they have
deposited their assets, especially the off balance-sheet items, placing their confidence
in the banking authorities and regulators in their role as banking supervisors.
It is paradoxical that, if a bank goes bankrupt, these same supervisory authorities
will have failed to identify problems beforehand and clients are now required
to know how to identify whether a bank is “at risk” or not.
This fundamental shift in the relationship
between clients and bankers has stirred only very few reactions, despite being highly
surprising in legal terms. Are there any other “retail” sectors in which, if a
company goes bankrupt, its clients are held jointly responsible and have to
participate in bailing out the company in question? When one of our car
manufacturers was on the brink of bankruptcy, there was never any question of
its clients having to sell the car they had bought to bail out the manufacturer
in question. In insurance companies holding life insurance contracts invested
in general assets, it would be possible to lose everything if the insurance company
were to go bankrupt.
Given these changes in regulations, it appears vital
to segregate the different businesses within global banks. Although it may be
possible to expect the client of a retail bank to understand the risks associated
with the retail banking business, it is less conceivable that the client may appreciate
the risks incurred by a trading bank, an investment bank or even medium and
long term financing and property investments.
It will probably be argued that even retail banking
incurs credit risk, through client loans, and that bank segregation will have a
negative impact by driving the cost of credit higher, as these retail banks will
be unable to benefit from the far higher profitability and diversity among
other business lines, which automatically boost inherent profitability. But are
we currently able to quantify off balance-sheet risks among multi-business banks?
Would they be able to undertake such off balance-sheet commitments and
therefore generate such high margins from their operations, if they did not
have the retail banks’ balance sheets at their disposal?
We are hoping for a heightened sense of
awareness within the banking system in 2016, regarding its
obligations arising from the paradigm shift represented by the segregation of
business lines, to shelter trusting clients from risk. We also hope that these
changes will be a source of opportunity and renovation for all market
professionals.
With all of our best wishes for 2016,
Olivier
de Guerre
PhiTrust
