The movement “Occupy “ is spreading in a number of international cities and is creating quite a stir with its protests against the human suffering caused by debt crisis. Its followers have been visible in 82 countries and this movement has become a new phenomenon of protests mushrooming around the world. It spread from the Wall Street and Madrid demonstrations to other cities with manifestations that have shaped public debate. Some of the protestors are focusing their accusations against the banking establishment and state quite categorically that both speculation and greed factors among bankers has been one of the main causes for the public suffering austerity measures. Not everyone agrees with this and there have been clashes with the protesters about the way they are blocking access to prominent places in some cities (like blocking the entrance to St Paul’s Cathedral in London).

As can be expected banks are suffering from past excesses and feeling the brunt of regulators who are expecting them to clear the decks and build up fresh reserves in their capital bases. Many hoped that the summit of the European leaders last week would produce the magic formula to solve this banking problem (among others). The formula concocted by the leaders of Germany and France is being called the fiscal compact. It is true that the fiscal compact consisting of a six-pack approved by 26 leaders can be considered a good start to stabilize the markets, but do not be fooled; many agree that the crisis has not ended yet. It is now important for this convergence of opinion by national leaders not to lose momentum and for the 26 to swiftly implement all those decisions that have been agreed so as to put the euro area economy back on course. It is regretted that UK used its veto and walked out of the agreement while the 26 EU member states voted to participate in a new treaty, to be finalised by March.

But the clouds have not cleared because many banks and other groups have found the going tough and had to close down or restructure. It is no coincidence that last week, Fitch Ratings downgraded the debt ratings for five major European commercial banks and co-operative banking groups, citing the eurozone crisis and stronger headwinds facing the banking sector. For example, French lender Crédit Agricole, which has felt the strain of losses due to the crisis has announced that it will cut 2350 jobs and close branches in 21 countries. Fitch ratings lowered the long-term issuer-default and viability ratings by one notch for a number of prominent banks including the French banks Banque Fédérative du Crédit Mutuel and Crédit Agricole, Danish lender Danske Bank, and Finland’s OP Pohjola Group and The Netherlands’ Rabobank Group. What is the root problem of so many banks feeling the pinch of the debt crisis in European countries and either requesting a bailout or closing down overseas branches? The question is not difficult to answer. Since tougher Basel III rules and the latest haircuts of 50 per cent on sovereign loans come at a time when banks are expecting their future profits to plummet, some banks are in a desperate state and would rather sell assets in overseas branches than raise equity to reinforce their capital base. The markets have discounted their weakness and their shares trade below book value.

After the monumental meeting to save the euro in Brussels last week, European banks were actively engaged in shedding trillions of euros worth of assets in a bid to slim down. A typical example is a UK bank that is biting the dust − the Royal Bank of Scotland (RBS). Really and truly commentators feel that the failure of RBS was caused by a failure of risk management in its investment sector. We remember how RBS was sailing high on the wind of fortune in mid-2006 when it made a strategic decision to expand aggressively. The expansion included a massive drive to expand its structured credit, which meant trading far more actively in complex debt products backed by US sub-prime mortgages. Everything looked rosy at the time and profits were rolling in but, due to complex accounting rules, the real position was that the bank was not disclosing £32 billion of loan losses. Just reflect how three years before the Lehman Brothers had crushed institutions such as RBS that harboured aggressive investment strategies including investing in exotic derivatives which on maturing reported losses of £6.2 billion. Another sad episode is that of the British bank Northern Rock. Last month it was privatised and sold to Virgin group at a massive loss of £400 million to the taxpayer. Northern Rock was bailed out in 2008 and the government placed a sum of £1.4 billion at its disposal at the onset of the global credit crunch. With hindsight one can question what when so wrong with the banking community when only a decade ago most were clamouring to expand and grow. Yes in the heydays when the sun was shining on bank’s share values (before the sub-prime collapse) many wanted to expand and climb on the bandwagon of high profits yielded by investment banks. European banks spent much of the last decade acquiring assets in an attempt to become massive, full-service global banks. Some got bigger by merging with other European banks, while others grew by taking over banks in foreign countries. The banks were also keen to issue and buy billions of euro worth of securitized investment products, like residential mortgage-backed securities, many of which turned toxic in 2008 and never recovered.

As a result of the greed and enthusiasm to grow bigger, we see how the eurozone banking system currently holds about 30 trillion euros worth of assets. This is a massive amount that surpasses the size of the entire US banking system, which stands at around 12 trillion euro. It will not be an easy task to bail out a banking system with mammoth assets surpassing the size of the currency region’s entire economic output especially during a recession. The penny has dropped and at last sanity is prevailing. Big does not necessarily mean better in such difficult times. It is time to slim down and cut the largesse. The ECB has put pressure on the banks to reduce their balance sheets. The European banks have in total pledged to shed around €5 trillion worth of assets in the coming years to comply with new, more stringent capital standards, as demanded by the EBA and the Basel III rules. But nobody wishes to start a fire sale. If banks want to shed loans there must be somebody (the ECB?) to pay for such toxic assets. Given the stress in the eurozone, the assets that are the most in demand are the banks’ foreign assets. The majority of those assets seem to be coming from the big banks.

Bruce Richards, the co-managing partner and chief executive of Marathon Asset Management, commented: “We are seeing billions of assets for sale from the European banking system from many banks in multiple different countries.” Locally, MidMed Bank was privatised 12 years ago and sold to HSBC at a bargain price. During the Nationalist Party administration of 1987 – 1992, in preparation for privatisation, 33 per cent of the MidMed shareholding was sold to the general public and the bank was listed on the Malta Stock Exchange. In 1999, HSBC Holdings plc purchased the 70.03 per cent stake in Mid-Med Bank with all its prime site premises for the princely sum of €184 million (balance sheet total now exceeds €5 billion). Without a doubt, this purchase of Mid Med Bank by HSBC was a bargain and to sugar the pill the privatisation unit agreed that the capital payment was to be paid over two years interest free. Bumper profits were registered since 1999 thanks to the reorganisation of business strategies and a more efficient use of human resources. Since then HSBC has sold one of the branches to Mepa (a government owned body) and now intends to dispose of a number of branches it is closing down. HSBC blames this on the difficult market foreseen next year. In the New Year it will phase out six branches and reduce service at one further branch and two agencies to cut costs and slim down. HSBC said this restructuring will not involve staff compulsory redundancies, but employees may apply for voluntary redundancy and early voluntary retirement schemes. Perhaps Santa Claus will be doing the rounds this year offering lovely prime sites for a fire sale although he may expect few buyers given the dire state of the property market this time around. Starting a fire sale of banking properties may not be an ideal move but then one can only right size through sacrifices based on a diet of lower operational cost.

To conclude, as with other banks in Europe, Malta is not immune to the wave of hardships that is hitting the international financial institutions in the current challenging economic and market conditions .The future beckons…

Merry Christmas to all readers.

The writer is a partner in PKF an audit and business advisory firm.