European leaders fought hard for a long implementation period for the new Basel bank capital rules because they knew that it was going to be punitive for the continent's undercapitalized banks to raise money to bolster balance sheets. Italian bank UniCredit is now showing just how punitive.
The bank on Wednesday said it was offering shares at a 43-per-cent discount to its already battered stock price.
According to Bloomberg News, the discount tops the ones seen since the financial crisis, such as a 30-per-cent haircut on Commerzbank AG stock last year and a 39-per-cent discount when HSBC Holdings PLC raised money in early 2009.
Small wonder then the temptation is so strong for European banks to try to cut their way to capital soundness by shedding assets rather than raising new capital. But with Europe's economy struggling already with lack of access to loans, policy makers need to avoid that at all costs.
The result is likely going to be a wave of shareholder dilution that will destroy vast amounts of value for investors in European banks. By some measures, UniCredit is not even at the worst end of the capital spectrum (See this post from the blog of strategist Barry Ritholz.).
There may a bottom in the European banking sector somewhere, but UniCredit is signalling it's not here.