Tuesday, June 13, 2017

After EU Bank Deals, Overconfidence

Santander bought out the failing Banco Popular, one of the largest banks in Spain and Portugal. Santander will spend €5-7 billion to recapitalize the bank, but that budget is in line with many of its other expansion deals. A few days later, officials agreed on the outline of a scheme to rescue Monte dei Paschi. The deal protects retail investors who were sold bonds thinking they were getting certificates of deposit. That was the Italian government’s top priority, so the deal may be seen as a success even if the bank goes on to fail in the next recession, a prospect that seems almost as likely as not. 

With these deals, there is more than a sense of relief about European banks. Europe and observers have become overconfident about the banking system. While it’s good that stockholders and bondholders took the biggest loss in the Banco Popular resolution, more work needs to be done to untangle the banking system so that the sudden closing of one of the banking giants doesn’t pose such a hazard to all the other banks around.