Thursday, 6 November 2014

European banking misery: pretending rather than mending, does no favours to lending

By Jakob Vestergaard

Today marks the operational start of the Single Supervisory Mechanism (SSM), charged with supervision of European banks. A milestone paving the way for the SSM was the comprehensive assessment of European banking, released last Sunday by the European Central Bank (ECB) and the European Banking Authority (EBA). Unfortunately, the assessment was more comprehensive than apprehensive – and does not bode well for the future of European banking.

To meet its objectives of strengthening bank balance sheets, enhancing transparency and building confidence, the comprehensive assessment carried out a “forward-looking examination of bank’s solvency”, based on an adverse scenario specified by EBA back in April. By now, the results are well-known: 25 out of 130 assessed institutions were identified to have a combined capital shortfall of €24.6 bn, but taking into account the capital raised by these institutions during the year, the number is down to €9.5 bn, distributed over 13 banks, predominantly Southern European, with only 8 of them actually having to take action (the remaining five already subject to restructuring). So, raise €10 bn in new capital, and European banking is well and fine? Not exactly.