Kully Samra, Managing Director at Charles Schwab, pointed out on Squawk box Europe last week that we can't blame bank balance sheets for the weakness. 'The selloff of financial stocks can be attributed to a combination of factors including central banks' negative interest rate policies.
However, the declines do not seem to be associated with a global financial crisis resulting from deterioration of bank balance sheets, since credit spreads for banks have only modestly increased relative to the selloff in these stocks. Also, bank credit spreads in Europe have widened less than those in the United States, suggesting that the sharp selloff in global financial stocks is more motivated by weak earnings than weak balance sheets.
The good news is that there are ways to reduce the spillover effects of negative rates. ECB vice-president Vitor Constancio said in a speech on Feb 19th that more stimulus could be provided in a way that mitigates "the immediate, direct impact on the cost on banks," though he added that no decision had yet been made. Analysts at Barclays, BNP Paribas and RBC capital markets have all suggested a 'tiering' of deposit rates could follow to help reduce the cost. Discussion of that is something to look out for on Thursday and will no doubt provide some a relief for banks investors.
Whatever Draghi decides to pull from his toolkit this week, I'm reminded of a question I asked him this time last year about the impact of extraordinary policy on the profitability of the insurance and banking sector. He acknowledged the concern but also said it was a 'high class' problem. The inference being that there were bigger issues to solve.
At the time I certainly agreed with him. But seven years after the crisis and with over a fifth of global gross domestic product now covered by central banks with negative rates, I think we are approaching the point where that "high-class" problem becomes a "high-cost" one.