Europe is “over-banked” and must face up to the “demise” of some of the weaker banks in the sector, according to the chairman of UBS.
UBS boss Axel Weber argued for what he calls “creative destruction” across European banking, in order to react to the changing landscape of banking and to ensure that the sector stays competitive in the future.
“Europe is over-banked so you would expect to see the demise of some weak players in the market and then their clients would basically start migrating to other, stronger, banks,” Weber said in an interview with CNBC.
However, Weber argued that this isn’t easy given the current climate of balance sheet reductions in the banking sector. Here’s what he had to say (emphasis ours):
Now a lot of the rescue programmes that are in place, prevent that from happening so whilst all the banks are probably no longer discussing insolvency issues profitability should lead to the exit of some non-profitable banks or less profitable banks, but in a too big to fail environment it’s very impossible almost for large banks to be able to acquire other banks because we are already facing a reduction in our balance sheet and for very profitable banks to take over clients and businesses from others because at zero rates there is an environment where the kind of creative destruction in the banking sector just doesn’t happen.
When asked if his comments meant that he thinks more banks need to fail, Weber said:
I wouldn’t say fail, but we need more bank competition in the sense that the stronger players don’t just help to support the weaker links but are actually able to take them over and integrate them into their own bank and therefore have a larger client base, create cost synergies, create more profitability and in that sense, Europe needs to move on and the banking sector needs to consolidate.
Fears about the strength of some banks within the European system are widespread, with last week’s €5 billion rescue package for smaller lenders in Italy a prime example of concerns.
The Italian government rallied bank executives, insurers and investors to put €5 billion (£4 billion) behind a rescue fund for its weakest banks.
The money will be poured into Atlante, which is a new fund designed to buy bad loans from lenders and invest in their shares in the hope that the re-energised banks will lend more to businesses and spur growth.
Earlier on Monday, as part of the rescue deal, it was announced that the IPO of Banca Popolare di Vicenza will now be underwritten by Atlante, rather than UniCredit — as had previously been expected.
However, some have argued that such rescue packages could be to the detriment of bigger banks, and the sector in general. On Wednesday last week, as reported by the Financial Times, ratings agency Fitch said: “In our view, the financial profiles of the large banks will weaken, and ratings could come under further pressure, if they are called on to continue to provide extraordinary support to the banking sector,” in its analysis of the Italian rescue package.