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European banks have been diligently bolstering their capital in recent years to fulfil increasing requirements. But as the regulatory cycle stabilises and banks have more clarity about their specific obligations, the trend is slowing or even reversing.

One outcome of the current situation is that the headroom banks have to their Maximum Distributable Amount (MDA) thresholds is likely to decline.

Consequently, when assessing the credit risks of investing in AT1 securities, Scope remains focused on issuer fundamentals and particularly on the stability and predictability of organic capital generation.

“AT1 investors should not be unnecessarily concerned about the headroom to the MDA threshold as banks overall are solidly capitalised, although differences still exist between individual banks. Importantly, management teams are now more focused and risk conscious. There are unlikely to be rash acquisitions or aggressive expansion into new businesses or geographies,” said Pauline Lambert, an analyst in the banks team at Scope in a report out today.

“Further, banks are working through legacy issues, such as conduct investigations and non-performing loans which pose threats to capital levels,” Lambert added.

Most large European banks have either restructured or are completing restructuring programmes forced by the financial crisis. Aside from the longer-term threats of new competitors and technologies, the earnings generation of banks should now be in a steadier state, although generally lower than pre-crisis. With growth opportunities still somewhat subdued, earnings are being returned to shareholders via dividends and share buybacks.

The report contains a summary of key…

Cass banking expert reflects on legacy of the crash

It’s been 10 years since Lehman Brothers collapsed, sparking the beginning of the financial crisis.

Dr Francesc Rodriguez Tous, a Lecturer in Banking at Cass Business School, reflects on its legacy and considers the current state of the banking sector.

What do you think has been the most significant legacy of the Lehman’s crash?

“It is difficult to choose just one legacy from the Lehman crash. If I had to pick one, especially thinking from an academic and policy perspective, it would be the realisation that the financial sector matters for macroeconomic stability.

“Before Lehman – and the unfolding of the worst part of the financial crisis – the consensus among policy-makers was that with the amount of regulation and supervision they were applying, the financial sector was safe. More importantly, it was not an issue for macroeconomic stability. What really mattered – what only mattered – was inflation stability. For academics, especially macro-economists, a similar situation was true, even though there were many more voices highlighting the potential problems.

“For instance, Raghuram Rajan, one of the greatest theorists alive, famously presented a paper in 2005 in Jackson Hole at the conference of central bankers, pointing to the growing fragilities in the financial system. This massive intellectual failure has had, and continues to have consequences, with raising unemployment and poverty leading to an increase in populist movements around the most consolidated democracies in the planet.”

Do…