I read your interesting piece on the reasons why European bank prices
are so low despite shareholder payouts running often at more than 15 per cent (“Europe’s zombie banks are grappling with distinctive drawbacks”, Opinion, December 5).
An important point that you don’t refer that could also raise banks’ cost of capital is related to the extremely loosely defined resolution powers of regulators (see how they left Credit Suisse shareholders with a rather small amount of money and even cancelled AT1 bonds).
How much of the true fundamental economic value of banks can be destroyed today by the possibility that in the future regulators could
act brutally in a precautionary manner when they find the level of remaining equity too low (but not yet negative)?
This is an interesting question, with no obvious answer. But with some reasonable assumptions about the regulators’ behaviour (who may give
a strong role to equity prices in their decisions to extinguish zombie banks), it
is possible to show that 100 per cent of the true value could be destroyed.
I believe that, on top of all the problems you refer, shareholders’ knowledge that they would be the first victims of zealous regulators in case of problems unfortunately contributes to the low valuations you converse.
Olivier Davanne
Risk Premium Invest, Paris, France
