Europe and America are inextricably linked. From economic and political alignments to foreign policy, the EU and the USA have similar agendas and are interdependent. Their economic ties are so important that the markets of these two nations depend on each other.
One major sector of cooperation is in banking – many multinational banks operate on both sides of the Atlantic. Currently, the uncertainty developing in the European financial markets (post-2008 financial crisis) has begun to impact the United States.
The European Banks:
Financial analysts and economists are fully aware of the current negative outlook for the European banks. For decades a lack of transparency, higher than expected credit losses and lower profits have haunted the industry, and these poor results have made both global investors and multinationals hesitant towards new investments in the EU. A lack of trust in European financial institutions further promotes uncertainty, worsening the overall situation. Finally, the European laws and policies largely favor the debtors.
Germany is considered to be the EU’s financial capital. Within the EU it is a huge global industrial power. Therefore, it can serve as a litmus test for other European countries and their economies.
Surprisingly, Germany has a mediocre and sub-standard banking system. As a European leader in the industrial and manufacturing sectors, Germany’s continued failure to revive its banking system is remarkable.
The main example of this is the central bank of Germany - Deutsche Bank. Despite being the largest bank in Germany, it has been struggling with its finances, profitability, and transparency for over a decade. Furthermore, ongoing problems project an even worse future for the bank. Bad assets, low loan repayments, and uncontrolled bankruptcy haunt the bank.
The Apparent Reasons:
Here are two of the best apparent reasons behind the Deutsche Bank’s current crisis as suggested by the financial experts and close observers.
Before the start of the 2018 financial year, the president of the Central Bank of Europe directed the European banks to address the growing problem of increasing load payment issues (bad credits). Instead of trying to improve efficiencies and loan recovery, European banks instead hid behind international accounting rules to hide their bad credit. They didn’t include loan defaulters before 2018 in their books and falsified loan payments, which they were not actually receiving.
Things like this give us a hint of why the European banks are in a poor financial situation. They never disclosed load defaulters before 2018. In the United States banks are required to recover a certain amount of a loan within a given timeframe.
Deutsche Bank received huge investments from the Chinese airline conglomerate HNA years back. The Deutsche Bank, which provides a vast range of financial services not only in Europe but also in the United States, was looking for an investment for years without any luck. Out of nowhere HNA appeared and bought a large share of Deutsche Bank. At that time, European politicians raised no questions about the owners of HNA and did not require any due diligence.
However, the equity investment by the Chinese airline HNA into Deutsche bank was largely supported by debt. Quickly, the company started to struggle in paying its debt back, and began selling its Deutsche Bank shares, further worsening the condition of the already sluggish and underperforming bank. The Chinese government is currently liquidating HNA. Still, EU policy makers are unable to identify the exact owners of HNA, which was, for a brief period of time, the single largest shareholder of Deutsche Bank.