Why European Bank Stocks Are Getting Hammered?

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European banks are currently going through a troublesome market situation wherein their stocks and bonds seem to be selling off at the same time. Share prices in the European stock market can be observed facing erratic drops. Be it the European financial firms or the German banks, rates of their shares are decreasing at a rapid rate. German champion, Deutsche bank dropped 9.5%; resulting in a fall of its valuation by almost thirty percent. Other such banks like BNP Paribas, UniCredit and Barclays among others are facing far worse a situation than the European companies.

What are the driving factors that have led such a situation? The truth is, while the financial segment is not facing a condition as grave as the one which occurred in 2008, but is building up to a form of crisis that can bring about an utter chaos among the mass. It is slowly becoming impossible for banks to build up even adequate capital bases to cope with the profitability crisis. Even the central banks have rendered to be of no use at this time.

Besides that, the meagre amount of interest rate that the banks have been earning lately hardly makes up any profits for them. Investors too have undertaken a very laid – back kind attitude toward this as they are  increasingly losing faith in the monetary policies.

There are a couple of consequences that can take place due to this. Given the lowering investment rates, banks are expected to charge higher for loans. Take for instance, Switzerland and their rising mortgage costs. Denmark is also slowly following Switzerland’s footsteps. This all and more is nothing but a result of the loose monetary policy that has subsequently led to a restriction in terms of credit.

Experts even say that if the European market fails to recover and thereby restore its growth, they stand the possibility of facing serious troubles with regard to their €1 trillion stock of bad loans.

Furthermore, due to the wave of restructuring and resizing of retail and investment banking businesses that have taken a spin in the Germany, Italy and France especially, most Eurozone banks need to continue adding capital. They don’t just need to add capital, but also require improving the quality of the same. And without taking the appropriate steps, economic recovery will remain unfulfilled. Banks will fail to achieve the set targets. Even their minimum capital needs will fall. Regulators will stop paying up, as well.

As you can see, each structure involved in the financial setup of the market plays some role or the other in leading to the current financial situation. This is the reason why the European bank stocks are getting hammered.

Like mentioned previously, if the steps taken to overcome this haven’t been thought through well, the situation will just worsen furthermore. They have two options at hand; either make riskier loans or launch another round of capital rising. What’s more? Both of these options are not feasible for the investors.