David Buik: Let Europe's weak banks be swept up -- or fail

Franco-Belgian bank Dexia said Monday that it will receive ? 90 billion from France, Belgium and Luxembourg, making it the first bank to get bailed out as a result of the European debt crisis

Story highlights

  • The German and French leaders seem to have reached some consensus on European banks' recapitalization
  • But there is no clarity around the plan, and the world does not have time to wait
  • There are too many banks in Europe, and the weak ones should be swept up, or fail
So finally, after long drawn out negotiations, German Chancellor Angela Merkel and French President Nicolas Sarkozy seem to have reached some consensus on the recapitalization of European banks.
However, they are unable to give us the blueprint of the agreement until the end of the month, just ahead of the G20 meeting in Cannes in early November. And it is not yet clear if the other 15 eurozone member countries will agree on the plans.
David Buik, partner at BGC Partners
This is nail-biting stuff -- the world really does not have time to wait. This financial crisis is more to do with the strength and stability of the banks than it has to do with Greece or any other philandering economy. If the banks are well capitalized, then the storm can be ridden through. But the longer the European Union takes to make decisions about sovereign debt the more damaged the banks will become. The strong banks will want to attract fresh private capital and the weak will be reliant of public and taxpayers' money.
It has become increasingly clear is that there are far too many banks in Europe. This crisis provides a classic opportunity to cut the number of banks by at least 30%. The EU should use its powers to force distressed banks into the arms of those banks with solid balance sheets. Clients and customers of banks not capable of meeting their financial obligations due to the toxic state of their balance sheets must be protected, with their assets and liabilities being transferred to safe havens -- regardless of the potential damage to existing shareholders.
Beyond Greece, banks in Italy and Spain are in need of rationalization because of the respective size of their economies. For instance, the assets of the vulnerable cajas must be swept up by the four main Spanish banks. In Germany there are also far too many landesbanks, or savings banks. Some are very strong, but there are plenty which have no place independently going forward.
Quick action will restore confidence. The model used by the UK government to protect the customers of Bradford & Bingley should probably be adopted as the norm in the next few years. If a bank's situation looks dire it should be closed and the business dissolved into: "The First Bank in Boot Hill."
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The banking industry is likely to look totally different in 10 years time. The large banks will be focused on corporate and investment banking and investment management, and retail banking will be dominated by large cash rich companies.
Look at General Electric -- it has a decent banking base. Why couldn't the likes of Tesco, Vodafone, and even Apple provide the best banking services imaginable? These companies' attention to the analysis of customer relations management is superb. They understand the nuances and foibles of retailer better than any other sector by a country mile. Surely our money would be very safe in these very competent hands? This may not happen soon, but it's possible in the future.
Meanwhile, Belgian's government has agreed to pay €4.5 billion for the retail banking business of Dexia bank, a dominant municipality lender. Belgium, France and Luxembourg leaders have drawn up a guarantee for Dexia's interbank and bond funding, of up to €90 billion over 10 years.
The markets are now waiting for results from other banks, including JPMorgan's on Thursday. Next week, Goldman Sachs will be in the spotlight.