Foreign retail banks are no saints

The post-crisis bank-bashing started off being against the investment banking ‘casino’ business. The British banks, however, are bracing themselves for the blows that have been hitting their retail business.

The scale of redress to mis-sold clients suggests that London is tougher on its banks in punishing bad retail banking behaviour than other countries. But overseas banks have their fair share of irresponsible mortgage lending and selling of toxic financial products to the average client.

Even the regional Spanish savings banks, the ‘cajas’, have lost touch with the local communities they are traditionally meant to serve.

Article continues after advert

The Spanish banks’ speciality – other than fuelling the housing bust in the country– was persuading ordinary savers that instead of putting their savings into simple time deposits they should buy subordinated bonds and preferred shares in the banks.

In 2009, after Spain’s housing bubble burst, the lenders suffered losses on the real-estate loans, and needed to raise capital. Since the international institutional investors started to fear Spanish bank securities, the cajas used their branches to market their shares and bonds to the average Spaniard.

The product was attractive, as it yielded much higher interest rates than regular deposits. As much as €22bn (£17bn) preferred shares were sold to households and pensioners who were assured by their bank branches that their life savings were just as safe in the securities as in deposits.

But when the cajas went into turmoil, the number of investors willing to buy the securities shrank, and the bonds and shares traded at huge discounts in the secondary market. Selling out of them was only possible at a very low value.

Most savers only realised that their money was trapped when they stopped by their local branches to withdraw some of their savings. Their trusted branch bankers had sold institutional investor products to people who did not understand them. And there was no redress.

The reason was that in 2011 the Spanish government used EU funds to bail out the troubled banks, and the European Union said subordinated debt holders and preferred stock owners must share the burden. This prevented a swap of preferred shares back for time deposits.

When Ireland made bondholders take losses, it was politically palatable, because the bondholders were banks and funds. In Spain, the bondholders were ordinary depositors. Images in the press of vandalized bank branches revealed that some fiery Spaniards sought their own redress.

In Eastern Europe, it is the foreign currency debtors’ debacle that sparks debate on redress.

In the years before the financial crisis, many took mortgages in Swiss francs, as the interest rate was much lower than in the local currency. When the crisis erupted, international investors piled into the Swiss currency, causing the franc’s value to soar against the Polish zloty or Hungarian forint, resulting in many Eastern European households struggling to meet their escalating monthly repayments.

The post-crisis bank-bashing in Eastern Europe was mainly driven by the problems of forex loan borrowers. Before the crisis, the governments were happy to see a lively lending market, as poorer citizens were made to feel well-to-do thanks to low-cost consumer and housing loans.