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2012-10-23 04:28:53
The real lesson from Citigroup: American banks are much healthier than European ones
Oct 20th 2012 | from the print edition
WHAT more appropriate way for Citigroup to celebrate the year of its 200th anniversary than with a public snafu? The abrupt resignation of Vikram Pandit, its chief executive since December 2007, surprised many inside and outside the bank. Board tensions are blamed for Mr Pandit s exit, although nobody, from the outgoing boss to Michael Corbat, the incoming one, has been able to articulate why it happened. Even by Citi s chaotic standards, it all looks odd (see article).
If European bankers were tempted to indulge in a bit of Schadenfreude, they would regret it. For all its faults, Citi provides a powerful reminder of how far America s banking system has come on the road back to normality and how far its peers in Europe have to go.
Mr Pandit s claims to have rebuilt the company will stick in the throats of shareholders, who have suffered an 89% dive in share prices during his tenure. But he oversaw a necessary slimming in the ranks of employees, ushered the government out of its ownership stake and beefed up Citi s capital base. The bank s worst assets were siphoned into a separate bit of the bank, Citi Holdings, which is being wound down. In the past 12 months alone the assets in Citi Holdings have fallen by $76 billion, to $171 billion. When Mr Pandit came in, Citigroup looked unlikely to survive. Now the grumbles are operational: pay is too high, bad assets could be sold even more quickly, the sale of a stake in Smith Barney, a retail broker, was mishandled.
Altogether, Citigroup has been bullied by America s regulators into raising more than $100 billion of new equity since 2008; in that time it has written off around $150 billion of bad debts and investments. By contrast, regulators in the euro zone have dithered over forcing banks to raise equity or to segregate assets in bad banks. The most any euro-zone bank has raised since the crisis is almost $30 billion and the biggest write-down is about the same: in both cases the bank is Santander of Spain, generally seen as one of the healthier European institutions. Add together the write-downs of the seven biggest euro-zone banks, and the total comes to less than $150 billion.
Citigroup s excesses were legendary and many of its losses were trading ones, but does anybody other than Europe s banking regulators really think its balance-sheet was so much worse than European banks ? Unlikely, especially in view of the euro crisis. Greece s private sector owes more than $60 billion to banks in other euro-zone countries; for Spain s private sector the figure is $440 billion. European banks have higher debt-to-equity ratios than American ones and have struggled to win the confidence of bond investors (see article).
Old-world envy
There was bound to be some divergence in performance between American and European banks after the crisis. Europe s banking systems are bigger as a proportion of GDP than America s, which puts more strain on government coffers when they need to be rescued; American banks have more deposits to call on, which eases funding problems; and the euro has hugely complicated Europe s adjustment.
Even so, a gap has plainly opened up. Both JPMorgan Chase and Wells Fargo (which between them have written off more than $130 billion) posted record earnings per share in the third quarter. For Europe s big banks most of the pain may lie ahead. America s banks are getting to the point where a boss s departure is a bombshell. Europe s capacity to shock is far scarier.