domingo, 2 de noviembre de 2014

domingo, noviembre 02, 2014

October 28, 2014 6:37 pm
 
Europe’s banks are too feeble to spur growth
 
One doubts whether the capital in eurozone institutions is enough to drive the economy forward
 
James Ferguson illustration
 
 
Will the asset quality review and stress tests conducted by the European Central Bank and the European Banking Authority mark a turning point in the eurozone’s crisis? Up to a point. They are an improvement on what has gone before. But they are not a complete fix for the banking sector, still less for the economy’s wider problems.
 
The optimistic assessment is that the ECB has at least done enough to mend the banking system. There are two things to be said for this judgment: first, the ECB has taken a close look at the quality of assets in the system; and, second, the “stresses” imposed in the tests are tough.
 
They seem comparable to those imposed by the Federal Reserve on US banks. The ECB concluded that 25 institutions, nine of them Italian, would need to add a total of €25bn in capital. This number has already fallen to €13bn because of capital-raising undertaken this year.
 
Perhaps the most important possibility omitted by this assessment is that of sovereign default.

This bears on a fundamental concern: risk-weighted capital requirements, on which the analysis is based, involve making judgments about the safety of different types of assets. This is especially problematic in the eurozone, where the lack of a unified fiscal backstop for banks means that national governments are responsible for rescuing troubled institutions.

Moreover, the solvency of the eurozone’s highly indebted members is more doubtful than that of countries with their own currencies. Since a banking crisis would be even harder to deal with in the eurozone than elsewhere, it would be wise for its banks to have bigger capital buffers that stand a better chance of preventing one. This is particularly important when actual leverage is so much higher than the risk-weighted capital ratios suggest. (See chart.)




Fortunately, banks with the smallest amount of equity relative to actual assets are located in relatively solvent countries, such as the Netherlands, France and Germany. Nonetheless, leverage is 20 to 1 in Spain and Italy; 25 to 1 in Germany and France; and 30 to 1 in the Netherlands. It is question­able whether this is enough loss-absorbing capital.

High leverage also impairs the ability of banks to finance growth. A responsibly managed yet highly leveraged institution would seek to make heavily collateralised loans, against property, for example; or to hold highly rated assets. This is likely to militate against the productive investment the eurozone needs.
 

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