The European banking sector
is a double edge sword and that is because if banks decide to seek additional
capital due to the fact that the majority of the loans extended are non –
performing and very high, either choice will be costly.
The announcement that Italian
banks have extended out loans (non – performing) worth 350 billion euros,
together with the speculation that Deutsche bank of Germany is in big trouble, led to the deterioration of banking stocks in
Italy. It is estimated that a majority of those loans have been extended to
households, which are in no position to pay back.
In Greece the banking sector
fell by 10%. The markets fear of a domino effect to spread out in Europe, and
the mandatory and unavoidable bail in of the banks. If they decide to seek
capital through public money, member nations in the EU will risk the soaring of
the public debt. In that case taxpayers will foot the bill.
If they decide to seek
capital via bail in, then shareholders, bondholders, and depositors will pay
the bail in of the banks. In Italy, the Prime Minister suggested that banks
should be saved by public money. Germany disagrees with this proposal and is in
favor of the second alternative, bail in.
By the end of July the
European banking stress tests are expected to be announced, excluding Greece.
Many banks will find themselves in need of additional capital, and go through a
recapitalization, as did the Greek banks, successfully.
The bank of England announced
today that it is worried about the financial system and warned of a next
banking crisis due to the win of the Brexit. In its decision, it announced to
relax the capital requirements of the banks so as to enhance them to increase
liquidity by extending loans to businesses and consumers. It is estimated that
about 150 billion pounds will be available to loan.
Non performing loan is a loan that is in default, or close to becoming default. A loan is considered to be non performing when payments of interest and principle are past due by 90 days or more.
Non performing loan is a loan that is in default, or close to becoming default. A loan is considered to be non performing when payments of interest and principle are past due by 90 days or more.
Bill T. Alexandratos, M.Sc., BA
Finance
