In a recent financial stability review of the Eurozone, the ECB has incorporated some remarkable statements and data in both its press release and the official presentation of its findings. Even though the first bullet point of the press release says the ‘systemic risk has gone down despite intermittent financial market turbulence’, the threat level still seems to be at an elevated level as the ECB considers the sovereign debt situation to be aggravating (as can be seen on the next image).
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This raises a lot of questions as it looks like the extended presentation of the ECB’s fact-finding paper is contradicting the bullet points in the short press release. If two of the three main parameters to determine the risk level of the financial system have remained stable and a third parameter is showing an INcreased risk, how can the ECB announce that the risk has been DEcreasing further? This doesn’t make any sense at all and it looks like the ECB has been trying to window-dress the results a bit.
Another interesting outcome of the ECB study is the situation of the banks in the Eurozone. As the next chart shows you, the leverage of the banks has been going down quite steadily from a ratio of 20-21 to roughly 16 now. This obviously was caused by stricter capital rules which were introduced to restore the confidence in the European bank sector. This also resulted in a much lower return on equity as several banks had to record large provisions for bad and non-performing loans as well as huge asset write-downs. Even though the Return on Equity is expected to increase again, the ECB is still warning for very weak bank earnings which might indicate that it’ll take longer for the balance sheets of the banks to be repaired.
The progress is obviously also being slowed down by the very weak economic situation of the Eurozone which sees its economic growth numbers constantly being revised. The bank-intermediated credit situation is still at alarmingly low levels and remains ‘scarce’ according to the ECB. Meanwhile, the central bank says the market-intermediated credit situation is much better and even extremely generous. That’s indeed the case as the current low bond yields show us. Even the premiums (mark-ups) on so-called junk bonds are at a very low level which is evidence of a flight to yield (see the next image).
The ECB pretends to have its finger on the pulse, but once again fails to propose potential solutions. It correctly sees that the bank-intermediated credit market has been incredibly tight – one would even be able to call it non-existing – yet it is actually tasking and trusting those banks to open up the credit markets again with funds provided by the ECB. Granted, it’s the banks’ mission statement to provide credit but the majority of Mario Draghi’s 1000B EUR bazooka will end up on the capital markets and not in the pockets of the consumers. The current resuscitation program will be a total dud, and we expect the European Central Bank to take measures in 2015 which will be unprecedented.
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