Whilst diplomatically presented as a merger, the union of Spain’s third and fourth largest banks, announced mid-September, is in fact the acquisition of Bankia by Caixa. Shares in multiple European banks rose on the news – Société Générale and Paribas of France were up 5%, Commerzbank’s shares rose 8%, while two other Spanish banks mooted to be considering merging, Sabadell and Bankinter, climbed by 11 and 6% respectively. Many commentators welcomed the news, believing the merger is a force for good. Bigger banks are stronger. However, there are several aspects to this transaction that should be of concern to bank stakeholders, taxpayers and regulators.
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As a reaction to COVID-19, governments are making extensive financial aid available. However, beyond helping out households and companies in need, aid also attracts opportunists. Because of this, the OSCE is expecting corruption to increase. Yet, this danger differs across countries, even within Europe, where corruption is less problematic than in other regions. In Scandinavian countries, corruption within the civil service affects people’s lives very mildly. In some countries of Eastern and Southern Europe, the situation is more complex but not hopeless, as shown by recent encouraging developments in a number of countries, e.g. Estonia.
In recent years, the word “populism” has been everywhere. The first figure shows the rising use of the term by considering the frequency with which it was googled over the 2004-2020 period. As one can see, the US Presidential elections raised considerable interest. Queries reached a peak at the beginning of 2017, when Donald Trump took office. A burst of interest in populism also went hand in hand with Jair Bolsonaro’s political fortunes in Brazil. He was indeed depicted by the International Press and by many neutral observers as an ultra-right-wing populist, who took the presidency of the world’s fourth-largest democracy by virtue of people’s frustration, disillusion and anger.
Whichever candidate wins the forthcoming US election, America’s big banks expect continuing concessions in the two key areas of monetary policy and bank regulation. Monetary policy looks unlikely to change much, with the Federal Reserve (Fed) under Jerome Powell committed to keeping interest rates lower for longer, trying to create some price inflation and growth. In terms of regulation, banks expect to be allowed to increase the sizes of their balance sheets. With little investor appetite for fresh equity, this implies a relaxation of the rules restricting leverage. Do banks prefer one candidate over the other?
While Europe’s GDP declines (12.1% in the Eurozone and 11.9% in the EU) and the debate on the EU next 7-year budget becomes heated, the relations between specific countries and the EU went largely unnoticed. The fact in point is that on July 10, the ECB welcomed Bulgaria and Croatia to the ERM2, aka as “the Euro’s Waiting room”.
Google, Apple, Amazon, Facebook, Uber, Airbnb: these are only few of the numerous companies which have fundamentally changed our lives with new technologies in recent years. While their business models differ, none of the stars come from Europe. Apart from the serial entrepreneurs at Rocket Internet in Berlin, SAP is the only big digital corporation in Germany. Is there a role to play for the EU in the attempts to change this? Yes, there is. However, not by means of new subsidies and detailed regulation, but by keeping markets open.
Edward Altman is professor emeritus at NYU’s Stern School of Business and director of credit and debt market research at the NYU Salomon Center. He is also the creator of the Z-score: a heuristic index to assess the credit worthiness (and likeliness to default) of companies. The Z-score is built as a weighted sum of commonly available corporate indexes of liquidity, reinvested resources, profitability, and market capitalisation vs liabilities (here the formula). As a scoring system, it does not originate from a precise theory. Rather, it is rooted in common sense, and parameters are calibrated until they generate some useful statistical regularity. For example, for public manufacturing companies, if Z scores higher than 2.99 then the company is not likely to default; if Z scores lower than 1.81 then the risk of default is considerable.
