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October 15, 2012

10 Things You Didn't Know About European Banks

After discovering the European Union's database on the banking system and downloading some of the statistics, I've found some interesting facts about their financial system.

10.  Central Bank assistance is evident on balance sheets.

The ECB is providing around 3 trillion euros in aid to the European banking system.  The only indicator that can hold these type of numbers is "Remaining Liabilities."  This is not a real surprise (hence #10), but when Central Bank assistance is evident on an entire continent's financial system, the risk for inflation certainly rises.

9.  Bank assets are depreciating.

While not clear by this chart, bank assets declined in August by $300 billion, going from 34.4 to 34.1 trillion euros.  This chart likely best reflects the instability that has existed in the European banking system over the past 4 years.

8.  Consumer credit is collapsing.





While it's not a surprise that consumer credit is falling, the fact that it is nearly 10% lower than it was 2 years ago is alarming.  The trend of the chart also compares this recession to the one in 2002-03, and the prolonged pain of these European countries.


7.  Interbank lending is struggling.


I really don't know what to make of this.  Could less interbank lending be because of access to the ECB?  Could it be because banks lack the financials to lend to each other?  Interbank lending has never been one of my favorite economic indicators, but its recent behavior is worth noting.

6.  Household lending is flat.

While lending to households is flat, it is important to note that the trend is getting closer to turning negative.  This represents 5 out of the 34 trillion euro balance sheet, so unlike consumer credit, a turn south here would have a more profound impact (approximately 8 times stronger). 

5.  Total lending is volatile, but up.


It is actually surprising that despite all of the problems, total lending seems to be increasing (except for the last month of data).  This likely explains why the Eurozone as a whole is not yet in a prolonged recession.  Typically, growth in lending provides some stability to overall economic growth, however, as indicated above, the foundation of lending is shaky.

4.  'Bank runs' have been relatively minor.
We've heard the popular press about bank runs in the EU, especially in Spain and Greece.  The numbers, however, show that the totality of the runs have been relatively minor.  Unfortunately, by the sheer volume of deposits (almost 18 trillion euros), we can see how much damage a bank run can do.

3.  Lending to the governments has escalated.
Despite the awful financial condition of sovereign debt in the EU, banks are actually lending MORE to the government.  I find this bizarre considering there are a number of other institutions that banks could lend to.  Could this be a consequence of big governments?

2.  Mortgage lending is actually increasing.

This is interesting considering a worldwide housing crisis (especially in the U.S. and Spain).  Mortgage lending has taken breaks, but has not fallen.  It's also a surprise considering EuroZone unemployment is 11% and rising.  So, who's buying these houses?

1.  The European banking system is actually capitalized.

Surprise!  There's equity in the European banking system and it's growing!  I was originally skeptical when I saw this because I simply figured that liabilities had outgrown equity, until I took a look at the leverage ratio.


The European banking system is the least leveraged in 15 years.  So, what is causing the problems?  The problem is a lack of confidence.  The confidence issue isn't stored in the performance of the banks, it's in the sovereign nations' ability to pay back their debt.  National solvency is at the center of this problem, so any ECB efforts towards helping banks may have little to no impact (as they've had already).

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