Business World

Thursday 8 December 2016

Banks as likely to fail now as during crisis - report warns

Published 12/05/2015 | 07:48

Mario Draghi, ECB president
Mario Draghi, ECB president

European bank are as likely to fail now as they were in the run to the global crisis seven years ago, a new report warns.

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Research by economists shows that despite changes to the banking system, policies introduced would do little to stop banks failing.

The study into the systematic risk in European banks showed that banks in countries like France, Spain and Italy were most vulnerable.

“The European banking system remains highly vulnerable and conducive to financial contagion, which implies that the policies designed to reduce systemic risk are not necessarily doing the job," said Dr Nikos Paltalidis, of the University of Portsmouth Business School, who headed up the the research published in the Journal of Banking and Finance.

Despite tighter financial controls, banks are still vulnerable.

“In theory, the new capital rules adopted by ’systemically important’ banks should be able to endure a 10pc fall in the value of their assets before placing panicky calls to the central bank.

“The findings suggest we might need additional policies to better protect the Eurozone and increase the resilience of the financial system.”

The researchers used a number of economic shocks on 170 Eurozone banks in 16 countries, and how the spread of their effects would hit other countries from 2005-2013.

They used three channels of systemic risk – the interbank loan market, the sovereign credit risk market and the asset-backed loan market – to test resilience of banks and how they would affect each other.

Dr Paltalidis said: “The results give a vivid picture of financial contagion and the domino effect in the banking sector. The risks are still substantial and a repeat of the last financial crisis is feasible.

He added that while the eurozone banking system seems to be fundamentally solvent when stress tested, the study provided ample evidence that this hypothesis does not hold in practice.

"Similar to the pre-2009 period, systemic risk is enormously underestimated once again.

“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.

“In case of a financial or economic shock, we found that banks would experience losses big enough to reduce their capital below the required regulatory minimum, because the quality of equity on the biggest European lenders is not sufficient enough to mitigate systemic crisis.”

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