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Disintermediation: a strong trend in Europe


The essential

Historically, the European economy relies heavily on banks to fund businesses, unlike the US. As a consequence, immediately after the crisis, which led to bank deleveraging, there was no established capital market solution able to provide the necessary liquidity for mid-market corporates. The relative withdrawal of banks, continued low interest rates and the search for yield and spreads have given a major boost to disintermediation in Europe.

Disintermediation is now a tangible reality in Europe, and the trend is not yet over. Admittedly, it has affected EU countries rather differently: for example, France and Belgium are ahead of countries like Spain, Germany, Greece, Denmark and Ireland. However, on the whole, investors, banks and corporate issuers are finding that their interests are converging as the trend continues.

CROSS ASSET (Download)

December 2016

Decembre 2016

The Article








Low interest rates and high cost of bank capital : a factor promoting disintermediation

The cost of capital has not really gone along with the downward movement on interest rates for several reasons:

 The weight of past crises: the return to normal never actually happened, as the 2011- 2012 bank crisis left long-lasting traces;

The fear of future crises: we know for a fact that the banking environment is still fragile in certain countries. In particular, we are thinking of Italy and its failure to create a "bad bank" due to the rejection of the European Commission when the other stakeholders, including investors and the ECB, looked upon its plan favourably. We are also thinking of the Portuguese and Spanish banking systems, and the direct consequences of recurring fears and rumours with respect to Deutsche Bank, and so on.

Regulatory uncertainty is also a factor behind the persistently high cost of capital. We don’t know what the contents of Basel 4 will be. The least that can be said is that regulation, which aims to prevent crises, does not spur growth. It brings us back to the usual debate about the pro-cyclical nature of regulatory measures.

The market’s failure to make distinctions between different banking systems. In reality, the market doesn’t know how to make that distinction. As for the banks, the talk is still about systemic risks, interactions between banks, and contagion. None of that helps the interbank market function properly, and even undermines the weakest banks and thereby impacts the most solid banks through contagion! This vicious circle is encouraging deleveraging and domestic retrenchment more than fluid exchanges, pooling of risks, and the assumption of additional credit risk.

The "abnormally" low level of interest rates and yield curves, with a direct impact on profitability and, hence credit supply. We could also add interest rate risk, which is now totally asymmetric. The more that banks believe that interest rates will remain low for a long time, the more they will be encouraged to dial back risk and ride against the tide of monetary policy.

On the whole, we better understand why banks are taking less risk with their loans, a trend that has negatively impacted SMEs. To this we must add the investments banks must make in digitisation. We also better understand why many corporates prefer to raise funding on the market rather than approach banks. On the markets, their funding policy can be more flexible and they can obtain better financing terms. Several weeks ago, Sanofi issued a three-year bond with a -0.50% yield. No bank would have offered them that kind of funding.

ITHURBIDE Philippe , Global Head of Research
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Disintermediation: a strong trend in Europe
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