3rd European lender comes under scrutiny in less than a week

It's been quite a week for the European banking community who've faced years of shallow earnings due to the low rate of interest offered by the ECB in order to perk up economic growth but more importantly halt the slide in prices away from the unwanted presence of deflation that could make policymakers lives just that much harder.

The European Central Bank's desire to spur on growth with easy money at below zero interest rate means the banking sector in Europe are having a tougher time generating income from conventional means, putting stockholders out of pocket in terms of dividends and sending the industry into a downward spiral in attempts to find alternate forms of return that aren't appropriate risks.

We saw speculation around the continuity of Deutsche Bank's existence enter the fray at the beginning of the week with many investors not seeing much hope for the German lender who has its back up against the wall with a litany of legal cases to deal notwithstanding a whopping $14 billion fine imposed on it by the US Department of Justice relating to the mis-selling of mortgage backed securities at the climax of the Financial Crisis bubble.

Besides this inconvenience, management has to deal further with the bleak outlook of oil prices having made considerable investment into alternate energy resources, most notably in the United States with regards to shale gas extraction. Lower oil prices has seen US producers battling to eradicate losses let alone break even translating into a scenario of a house of cards for the European lender.    

Largest Dutch Bank To Fire Thousands https://t.co/4b3wbEhLdt

— zerohedge (@zerohedge) September 30, 2016

Since then we heard from the second largest lender in Germany and main competitor to Deutsche Bank, Commerzbank announcing a restructuring program that'll see 9600 jobs shed by 2020 and dividends cut to fund it. Deutsche Bank has a similar program in place so it was only a matter of time before the others joined the party.

Today we've heard unconfirmed reports that the Netherland's biggest lender, ING Group, might effect the same when it hosts its stockholders early next week leaving many wondering if these measures will become commonplace amongst Europe's top lenders.

The crux of the matter is these actions should send alarm bells ringing in the headquarters of the ECB who have insistently delved deeper into the experimentation of low interest rates for extended periods on end without fully realising the wider consequences of their own actions.

We shouldn't forget that one of Europe's greatest value producing sectors is the financial industry, providing thousands of jobs for highly skilled people who spend a high amount of their incomes in other sectors of the economy. If the proposed job losses are to go ahead all the good the ECB believes it can do in helping economic growth tick up will fall in a heap.

It again comes down to what I've said earlier in the week, the decision by the ECB will not be taken on which action produces the best outcome but rather the one with the least consequences.

Why is the European financial system is getting shakier by the day?

The pressure inside the European financial system doesn't seem likely to lower anytime soon with the latest development coming out of Deutsche Bank who received a demand from the US Department of Justice ordering the corporation to settle a $14 billion fine related to mortgage-backed securities that were mis-sold to the public during the build up to the 2008 Financial Crisis.

However top management responded quickly to dispel speculation over the mammoth amount it could potentially have to pay over to US authorities by indicating that it expected to pay the penalty but confidently said it would be able to negotiate a lower charge as US banks had done prior to settlement.

This comes on the heels of an impending Italian banking crisis that threatens to renew fresh calls for a breakup of the world's largest economic trade bloc, the EU. Currently Italian banks are holding a monumental €360 billion of soured debt on their balance sheets with little to help free up bankers ability to deal with it. Much of the focus has been turned on the world's oldest bank, Monte dei Paschi, who seemingly looks like the weakest link in a long line of exposed institutions.    

Deutsche Bank says to solve problems without help from Berlin https://t.co/4SzoXE9T3v pic.twitter.com/5OTWETYYkK

— Reuters Top News (@Reuters) September 26, 2016

Looking past the calamitous state of affairs, one aspect remains the chief detriment in the destruction of the European financial system which is the issue of low and negative interest rates, a sore topic for most banking institutions in Europe who have bemoaned it's place and suffered gravely as an inability to generate healthy income has been stunted by its protracted implementation.

In the case of Deutsche Bank, management had decided to offset the effects of a slim delivery of earnings through increased exposure in riskier assets, some of which included loans to the US energy sector. All it took was a collapse in oil prices for fear to be released amongst stockholders surrounding the capacity of Deutsche to absorb the losses incurred from non-performing loans when considering the little reserve's built up from bleak earnings.

With Italian banks it's a situation of institutions being in possession of inexpensive liquidity coupled with lowly sustained economic growth that caused government to use banks in averting a crisis. But as what we've seen evolving in the broader EU economy, increased monetary supply didn't lead to the deserved effect so many policymakers had wished for leaving many big name banks in a precarious position of holding onto debt that couldn't be paid for with the absolutely no prospect of growth in the future, only driving the fear of a mass default even closer.

The problem the world has now and more specifically the European Union is deciding what action will yield the least consequences because if we cast our minds on either objective we soon realise that there can be no relief from the pressure if the curtailment isn't dispensed in the other.The ECB is trying so desperately to get European consumers and manufacturers to produce value but in the same breathe pushing the stability of their financial system into jeopardy in reaching its goals.