MarketLine Blog

Banking sector in Europe. Never ending recovery.

The Eurozone is still facing considerable financial instability according to a European Central Bank press release from July 13th. Austerity policies adopted by many European governments in the aftermath of the Greek crisis of 2010 increased its financial instability by suppressing the nascent economic recovery seen between 2009 and 2010. Fortunately, the prolonged assistance from the European Central Bank (ECB) reduced the level of bankruptcies in the financial system to a bare minimum.

Fiscal policies, most notably tax increases and government cuts, that came in to force after the Greek crisis, significantly reduced the growth rate in the Eurozone. The region expanded by 2% between 2009 and 2010 but by only 0.4% between 2010 and 2013. This weak economic performance is exposing the banking system to increasing risks from their creditors and reducing their profitability.

Not surprisingly, ECB monetary policy, which has been expansionary for more than five years, has considerably improved the liquidity of the financial system. In December 2007, the ECB along with the Bank of England, the Federal Reserve and the Swiss National Bank started to address the lack of funding in the short-term markets in Europe. The Federal Reserve provided an initial swap line of $20bn to increase the liquidity in the European short-term fund market. After launching a series of long-term refinancing operations (LTROs), aimed at supporting the normalization of the euro money market, the Bank adopted extraordinary liquidity measures, allotting EUR489bn (approximately $628.4bn) to 523 banks over a 36 month refinancing operation starting at the end of 2011. The first wave of refinancing was followed by an even bigger wave that flooded 800 European banks with EUR530bn ($681.1bn) starting from March 2012. What’s coming next?

The depth of the financial crisis was clearly underestimated by the ECB and European countries in 2007 even after the collapse of Lehman Brothers a year later. Long-term refinancing operations are insufficient to shore up the balance sheets of European banks. Growth cannot be suppressed because it is the only solution for the reduction of private and public deficits, and bank exposure to risk.

For more information on the European banking industry, read the MarketLine industry report.

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