European Banks  



By Barry Edwards

European Banks


There has been a lot of comment this week about European banks and the vast amount of non-performing loans (NPL) that they have accumulated since the financial crisis in 2007/8. The European Commission have been planning to re-awaken the securitisation market to allow some of these NPL’s to be securitised and issued as bonds. However the Commission has ruled that they will not allow self-certified mortgages to be included in these issues which has thrown a spanner in the works. Many of these mortgages prior to the crisis were self-certified as they were in the UK and USA although that has now been disallowed in most countries.

This will restrict the market in European securitised mortgages but fortunately there has been a lot of money raised by specialised institutions, mainly in America, to invest in NPL’s held on the balance sheets of Europe’s banks, including commercial loans. The target countries for these funds are Italy, Spain and Portugal where the problem is most serious.

The total estimate of NPL’s in the EU currently is €1,000 billion (or €1 trillion) which has been severely limiting the lending capacity of many of these banks. Clearly, the reason this is such an important matter is that most finance available for business in Europe comes from bank lending unlike in America where it is about 40%. The balance there is taken up by non-bank invoice discounting, capital market bonds and government sponsored securitised entities for small and medium sized businesses (SME’s).

Since the EU is recovering from the financial crisis and growing at around 1.8% annually, this subject is becoming urgent as businesses need working capital finance to fund their growth which is not readily available to SME’s, the backbone of most economies. Funding in the UK for this sector has been restored since the crisis and most SME’s can access finance from a variety of sources as the alternative finance sector has flourished and is beginning to merge with bank lending for smaller companies. Europe is beginning to catch up but is still a long way behind The UK and USA.

The Capital Markets Union (CMU) is the concept the EU has proposed to address this commercial funding shortage but it has been slow to evolve mainly because of the NPL problem.  The purpose of the CMU is to develop the capital markets of the EU and harmonise the rules and regulations of all countries to create a truly European market similar to the USA. Incorporated within the CMU are various plans to establish a banking union that provides cross guarantees by all banks throughout the EU. The northern countries are cautious about adopting this plan because the NPL’s are held mainly in eastern and southern countries.

There is already a vast transfer of funds from the northern countries to the east and south via the Target 2 mechanism (there is detailed information about this on the Internet) which is creating reluctance by the north to increase this beyond the current level. Consequently, the importance of resolving the NPL problem is now very urgent if the CMU has any chance of becoming a functional concept.

Many commentators are very concerned about the survival of the Eurozone in its current form and believe there is a big risk if another financial shock occurs anytime soon. Therefore, it is vital to put the European banking system on a much firmer footing if there is any chance of the Eurozone surviving another crisis. It would clearly create a worldwide depression if it did occur and that is why there is a lot of pressure to move quickly to resolve this NPL problem.

It is not only the urgency of providing companies in the EU with a range of funding methods to help them grow and prosper but the establishment of a flourishing EU banking system and the actual survival of the Euro itself. It is the view of many in the financial community that big changes must happen soon and delaying resolution will only compound the risks.

Brexit has concentrated minds about the Eurozone since many of the financial services provided in the EU come directly from London at the moment. Many of the services that the CMU will provide would have been managed by firms in the City and there is real doubt that without this expertise being made available, the CMU would struggle to develop in the way the European Commission would like. We will have to wait and see how the negotiations progress but it looks as though the future of the European banking system and Brexit are intertwined.

That’s all for this week, more observations next week.


3 thoughts on “European Banks  ”

  1. Interesting and helpful information.

    Thank you.

    Can you tell us more about how 60% of American lending falls outside the banking system?

    Invoice discounting is?

    Government sponsored securitised entities is a complete mystery.

    1. Invoice discounting is finance advanced against unpaid invoices that have been accepted as good credit for the purpose of providing working capital for growth.
      Government sponsored securitised entities are commercial loans that have been granted by licensed lenders that are then pooled or securitised into bonds and issued to investors seeking yield for income which are ultimately guaranteed by government against non-payment by the borrower. This is a mechanism adopted by Germany, France and Spain and quite a few other countries. It provides substantial funds for SME’s who find it difficult to borrow from banks.
      In the USA there is a large capital market bond issuance system for established small and mainly medium sized businesses that provides a major part of the funding for companies and it is this system that the CMU is trying to emulate in the EU.

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