European Banks Also Face More Pain

Wall Street is in turmoil and the rest of the world looks on with trepidation.

Thousands of miles away, banks across Europe are being forced to face up to the fact that there is more pain to come for them. Deciding which will be the last bank to collapse in Europe will be harder than it was to predict which would be first. That was in Germany last August, when the regional lender Sachsen Landesbank was sold to Landesbank Baden-Wüerttemberg to save it from collapse.

Most analysts are united, though, when they say that Europe will experience more pain and inevitable consolidation in the financial sector.

Only last month, the American private-equity firm Lonestar acquired the rump of German lender IKB, the country’s most prominent casualty of the crisis so far. It nearly collapsed a year earlier under the weight of $24 billion (£13.4 billion) in investments linked to home loans. As the cost of a state rescue spiralled to $14.8 billion, the German government began looking for a buyer.

Denmark’s central bank could not find a buyer, so it injected $1 billion to keep Roskilde afloat, assuming its debts and loan book.

“It is too early to say when we will terminate our involvement; it’s a process that may take some time, but of course the intention is not for us to continue as owners of a private bank,” said Nils Bernstein, the Danish central bank’s governor. Politicians all over Europe share his hope, but many are braced for trouble all the same.

The good news in Britain is that future collapses could never be as chaotic as that of Northern Rock, when the Financial Services Authority (FSA), Bank of England and Treasury were all found wanting.

Lloyds TSB had looked at taking over Northern Rock but the government had pulled the rug from under the deal. Then the government tried to organise an auction for Northern Rock. In the end it opted for nationalisation rather than selling to a management buyout led by Paul Thompson or to Sir Richard Branson’s Virgin Money. This was despite warnings from its adviser, Goldman Sachs, that the state-owned route could cost taxpayers up to £1.3 billion.

Chancellor Alistair Darling’s special-resolution scheme is designed to safeguard depositors if there is another collpase.

Darling wants to put the FSA in charge of spotting institutions that are about to fall into difficulty. He wants to give the Bank of England powers to intervene and put the institution in state hands until a private buyer can be found.

In the meantime, Bradford & Bingley is shrinking mortgage lending after it secured a £400m injection from a rights issue when the private-equity firm TPG walked away from purchasing the bank.

There are lingering doubts about the capital strength of HBOS, even after its £4 billion rights issue. Barclays, meanwhile, is heavily exposed to the Spanish property market, which has slumped.

Although Spain is home to two of Europe’s strongest banks in Santander and BBVA, there are plenty of smaller groups that could go to the wall after the Iberian construction boom turned to bust.

Back home, some of the weaklings are already being hoovered up. Santander is in the throes of buying Alliance & Leicester for £1.3 billion.

“If you don’t fully understand an instrument, don’t buy it,” Santander chairman Emilio Botin said recently as he counselled junior bankers at an awards ceremony. “If you would not buy a specific product for yourself, don’t try to sell it. If you do not know your customers very well, don’t lend them any money.”

Anticipating that it is too late for many institutions to heed this advice, Clive Cowdery, who mopped up a string of closed life funds, announced plans last week to relist his Resolution vehicle with the aim of snapping up ailing insurers or small lenders.

The financial crisis has even extended to the mutual world. One million savers and borrowers in the Derbyshire and Cheshire building societies will lose out after they were taken over by Nationwide last week.

Graham Beale, chief executive of Nationwide, insisted that the deal had not been forced on him by the FSA.

Stort from Times Online

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