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Banking on the next #FinancialCrisis

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A series of scandals and setbacks in the banking sector in Europe and elsewhere threaten to undermine public confidence in the industry. While there is considered little chance of an economic downturn on the scale of the 2008 banking crisis, there is concern that recent events in the sector could reverse efforts made to restore trust in banking. Arguably the most serious recent development was the decision by Deutsche Bank to lay off 18,000 staff, one fifth of its global workforce, as part of a huge restructuring plan. DB Chief Executive Christian Sewing hopes the €7.4 billion plan will turn around the bank, whose shares hit a record low last month, writes Colin Stevens.

The bank’s travails have reignited fears of a possible repeat of the 2008 crash which was the greatest jolt to the global financial system in almost a century – one that pushed the world’s banking system towards the edge of collapse. The big concern, according to experts, is that governments do not have the policy tools they had in 2008 to prevent a financial shock turning into a freefall, and overall debt levels are higher than during the previous crisis.

Harvard University Professor of Public Policy and Professor of Economics and former chief economist of the IMF Kenneth Rogoff said: “When we have another financial crisis, our tools are limited.”

Such concerns are reinforced by claims that eurozone banks might be much more vulnerable to a repeat of the 2008 financial crisis than EU 'stress-tests' have previously said.

This is according to an audit by the European Court of Auditors (ECA) in Luxembourg which says that stress tests, published last year, excluded many of Europe's weakest banks, ignored key factors that could cause a bank to fail, and used simulations which had nothing to do with the 2008 crisis.

German bank DB already did badly in the EBA's last test, but the negative audit suggests that its problems could be even worse than previously thought. The 2018 stress test included just 48 banks, down from 90 in its first survey in 2011, because it changed the criteria so that its "actual threshold" covered banks which held €100bn or more in consolidated assets "to the exclusion of some countries with weaker banking systems”.

On top of the perils of a new downturn, the continent has also been recently rocked by multiple banking scandals, all with international implications. Experts say this shows that more oversight of the banking sector is still needed, citing, as a prime example, the case involving Bankhaus Erbe’s “sham” acquisition by Czech bank J&T. J&T Banka is a financial conglomerate from Eastern Europe, which is registered in Slovakia, but also operates in the Czech Republic (where its headquarters is located) and many other countries.

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Valentina Romanova, president and former owner of Bankhaus Erbe, has been accused of perpetrating a double sale of Bankhaus Erbe after selling a 59% stake in the bank to businessman Pavel Komissarov for a sum of $13.7 million, only to turn around and sell 100% of its shares to J&T.

Romanova, the daughter of a former member of the Politburo of the Central Committee of the Communist Party under the Soviet Union, stands accused of taking Komissarov’s payment but refusing to issue the necessary documents to validate the sale. According to Komissarov, Romanova also ignored his alternative proposition of returning the funds and voiding the sale. Komissarov is now suing Romanova in Russian courts, holding that he was defrauded of his $13.7 million investment.

Romanova, for her part, has responded to press inquiries about the case by outlets such as Russia’s Novaya Gazeta with threats of legal action, brusquely informing the paper that her husband is “a former deputy attorney general and head of the Investigative Department of the Prosecutor General’s Office” in an apparent bid to threaten the journalists into backing off the story. Instead, they published her message in full.

This scandal is not the only recent setback to the banking sector’s already badly tarnished reputation. For example, Jesper Nielsen, a top executive at Danske Bank, was fired recently in a scandal involving overcharging customers. He was the longest serving of the 10 people at the top of Denmark’s biggest bank which is struggling to restore trust after a $230bn money-laundering scandal exploded at its Estonian unit.

Elsewhere, the Moldovan parliamentary commission has just published the second part of an investigation detailing the disappearance of some $1bn from the nation’s banking system, an event that the tiny, impoverished country is still reeling from. Aleksandr Slusari, the parliament's deputy speaker and chairman of the body’s investigative committee, has demanded to know who was responsible for the disappearance of the funds, blaming the prosecutor's office for hiding it.

Rogoff added: ”Unfortunately, when there is a financial crisis, a debt crisis, any kind of crisis, the hardest hit are almost invariably the disenfranchised, the poorest people and, very often, the middle class. So, a financial crisis would be bad for the wealthy but it would be worse for ordinary people. So, when we think about protecting the economy from a financial crisis, it's not just about protecting the wealthy financiers; it's about protecting ordinary people.”

All these issues represent a challenge for incoming ECB chief Christine Lagarde. Lagarde, a lawyer, will take over at a time of economic uncertainty with Megan Greene, economist at the Harvard Kennedy School, saying: “Largarde’s lack of direct experience of working in financial markets is also notable and could be relevant if Europe heads into recession.”

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