In this interesting article, Patrick Jenkins wonder why price-to-book ratios are generally rather low in the European banking sector. He argues that under a favourable scenario, “Europe’s banks may one day make it back to book value, finally expunging the zombie phenomenon”.
In a letter to the FT, that was published, we added that banks’ high cost of capital may also be related to shareholders’ knowledge that they would be the first victims of zealous regulators in case of problems.
Indeed, we have often stressed how worried we are by the current approach of bank resolutions and how it may trigger “death spirals” in share prices.
In the following paper, we argue for a radical new approach in the way we deal with weak banks.