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October 8, 2012

European Banks Owe 3 Trillion Euros to the ECB

How are Europe's banks as a whole performing?  The Eurozone balance sheet shows the volume of Europe's debt crisis is unbelievably staggering.  Europe's banking system is leveraged 17 to 1.  For every euro of capital/equity in  the banking system, there is 17 euros of debt.  A fully leveraged system would be at 20 to 1 (this is where most banks could no longer micro-lend, which increases the money supply).  Europe's banking system cannot consider itself healthy until they are leveraged below 15 to 1.

I wanted to focus on the ECB aid portion of the banking system.  This balance sheet is hard to read, but if you go down to "2.7 Remaining Liabilities," you can determine that this section clearly covers ECB aid to banks.  In 2005, remaining liabilities hit 2 trillion euros.  Last year, when the debt crisis hit, remaining liabilities grew by hundreds of billions of euros in a few months.

Currently, the remaining liabilities are at 5 trillion euros.  As Bloomberg reports, 3 trillion of the 5 trillion is money owed by European banks to the ECB.  In dollar terms, this equals just under $4 trillion or nearly twice the Federal Reserve's balance sheet.  How can expanding the balance sheet help ease interest rates if the ECB has already expanded the balance sheet by almost $4 trillion?!

Remaining Liabilities, European Union banks

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