Article / 27 July 2017 at 13:15 GMT

Banking 10 years after the crisis

  • Ten years ago the financial crisis sent its first dark signal 
  • Banks seem to be much better equipped nowadays, but are they really?
  • US and European financial institutions differ
  • Trump's re-regulation bears a risk
  • Cerberus acquires stake in Germany's second largest lender
  • If interest rates rise, real estate owners might get in trouble
  • If rates stay low, that's bad for banks
Strange symbolism - figures of a polar and a black bear in front of a 
Commerzbank branch. Photo: Shutterstcok

By Clemens Bomsdorf

Remember summer 2007? That’s when it all began. In May of that year, Bear Stearns hedge funds got into trouble, and at the end of July Germany’s IKB bank disclosed huge losses with subprime investments. Roughly a year later, Lehman Brothers collapsed, and we all know what followed. 

What’s left now, a decade later?

Stocks flying high, rates low

Stocks are at all-time highs again in major markets, but financial institutions are far from completely out of the woods. Instability in Italy's banking system has become a European worry. Deutsche Bank sent mixed signals with today's second-quarter earnings report. While the result beat net-profit estimates, the outlook was not that good. Revenue fell and will do so for the whole year as well, the bank predicted (see here for a Reuters report and here for the full result).

Banking regulations have been tightened, and the Fed’s Janet Yellen has said she does not expect another financial crisis during her life time. But Yellen is 70 already, and previous Fed chairmen, including Ben Bernanke, have been wrong too. Also, under President Donald Trump, deregulation rules again, which endangers stability.

Lehman Brothers survived 150 years, but not much more. Photo: Shutterstock
Opinions differ in Europe's largest economy 

Some things are better, some worse in the European Union where regulations have been made stricter. Economists disagree, however, on how much this helps the financial system and the economies overall. While Peter Bofinger, economics professor and member of the economic council consulting the German government, points to the increased capital base of banks, his colleague Isabel Schnabel says international harmonisation, such as through Basel III, still needs to be improved (both were speaking to FAZ, not all is online, but see for example here ).  

Commerzbank share price 2011-2017 (click to enlarge)
Source: Saxo Bank
Staying with Germany, US investor Cerberus has announced it bought a 5.01% stake in Commerzbank, the country’s second biggest after Deutsche. Ceberus apparently believes in the future of the European banking market, at least in German-speaking countries. It also owns Austrian Bawag, which is expected to go public soon, and is said to be interested in two more privately held German banks: Wüstenrot and HSH Nordbank. Commerzbank’s share price, though is up more than 100% since last summer, is still far below book value.

Real estate prices in Berlin have skyrocketed recently, but 
interest  rates will not be low forever. Photo: Shutterstock
Very low interest rates have led to increased interest in real estate, as monthly payments for such are low. But interest rates won't stay low forever, and those who could secure rates this year and last year at far below 2% per year for a decade might find themselves in shock when borrowing at much higher rates 10 years from now. 

Higher default rates are at least a risk. Schnabel says that the low interest rate policy of the European Central Bank endangers banks’ business model and creates new risks in the financial system. Let’s see how Commerzbank and  the others do 10 years from now.

— Edited by John Acher

Clemens Bomsdorf is a consulting editor at TradingFloor
Jim Earls Jim Earls
Fact is the world financial system is far more leveraged than anything that existed in 2007. Central banks, in particular, have taken on exhaustive leveraging of their balance sheets. Put simply, the situation is far worse today than the last crisis of 2006-2009. Market economics should have been allowed to work properly in 2008-2009-now the situation is more unbalanced than ever.


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