European Bank Bail-ins? Banks 'As Vulnerable Today' As Before 2008 Crisis [9]
- Euro banks no more stable now than in run-up to 2008 crash
- Banks in France, Spain and Italy are “highly vulnerable to failure”
- Low quality bank equity not sufficient to withstand shock
- Risk to system “enormously underestimated”
- Investor deposits at risk of “bail-ins”
[10]New research shows that European banks are as likely to fail today as they were preceding the global economic crash seven years ago.
Leading economists say that the European banking system is still highly vulnerable to financial and economic shocks despite the various policies which have been put in place to protect against such events since the collapse in 2008.
According to research by the University of Portsmouth Business School which was published in the Journal of Banking and Finance European banks are as vulnerable today as they were in the run up to the crisis of 2008.
The research suggests that southern European banks - particularly those of France, Italy and Spain - are “highly vulnerable to failure.”
[11]
The economists modelled a range of interconnected, dynamic economic shocks on 170 Eurozone banks in 16 countries, and the spread of that effect to other countries from 2005-2013.
The research focussed on threats emerging from three independent sources of risk - the interbank loan market, the sovereign credit risk market and the asset-backed loan market.
The models sought to determine the resilience of various systemically important European banks and “to track how shocks spread between domestic and international banks.”
Researchers found that “the European banking system remains highly vulnerable and conducive to financial contagion” and that speed of contagion and bank failures in southern Europe were “markedly more prominent”.
France, Spain and Italy appear to be dramatically more exposed to failing compared to their neighbours in one of the models. This showed France losing 73 billion euro compared to Belgium's 6 billion euro after the same economic shock from the same source.
Dr Nikos Paltalidis [12], who led the research, is skeptical of the conclusions of stress tests which claim that banks could withstand a 10% drop in the value of their equity or that the banking system in the euro area is solvent.
He believes that the quality of the assets held by some key banks is of poor quality and in the event of a shock to the system they would cause the value of bank capital to below the required regulatory minimum.
"In theory, the new capital rules adopted by 'systemically important' banks should be able to endure a 10 per cent fall in the value of their assets before placing panicky calls to the central bank. Also, the euro area banking system seems to be fundamentally solvent, according to several stress tests.”
“However, our study provides ample evidence that this hypothesis does not hold in practice, indicating that similar to the pre-2009 period systemic risk is enormously underestimated once again."
Dr. Paltalidis states the following:
"Our findings indicate that despite all the efforts to improve the resilience of banking, some banks are as vulnerable today as they were before the last banking crisis, they are just as likely to fail.”
Frequent readers of our blog will be well aware of the risks posed to bank deposits by a bank failure.
While governments have sought to assure the public that their savings are safe due to bank deposit guarantee schemes they have been working behind the scenes to extricate themselves from that responsibility.
We reported last month on how the Austrian government was pushing through an EU law earlier than scheduled which removes all responsibility of the government for the bank deposits of its citizens. This legislation is due to be rolled out across Europe this year.
Long time readers will be aware that Irish Finance Minister Michael Noonan is on record as saying “bail-ins” [13] are now the rule.
[14]Bank deposits are increasingly vulnerable given the risks to the banking system and the likelihood of government reneging of deposit guarantees and of bank bail-ins in the event of a crisis.
Allocated and segregated gold bullion coins and bars held out-side of the banking system in stable jurisdictions like Switzerland [15], Hong Kong [16] and Singapore [17] will again protect in the likely event of another financial or economic crisis.
Must-read guide and research on bail-ins here:
Protecting Your Savings In The Coming Bail-In Era [18]