European banking system

Paul BASCHET

European banking system

In the last six months, the euro zone has faced its biggest economic crisis. One sparked by the Greek debt crisis which has migrated to the rest of the monetary union. But well before the sovereign debt crisis, Europe was facing a full-blown banking crisis that did not seem any closer to being resolved than when itbegan in late 2008. With investors and markets focused on European governments’ debt problems, the banking issues have largely been ignored. However, the sovereign debt crisis and banking crisis have become intertwined and could feed off each other in the near future.

Origins

2009 is an important step for banks in the euro area, with 450 billion worth of euros ($ 541 billion) of loans duenext European Central Bank (ECB). The loans were part of the proposal a year of liquidity from the ECB made in 2009, which was expected to help stabilize the banking system.

However, one year after the ECB provision was initially offered, banks in the euro area are still struggling, and now Europe’s banks must collectively provide cash roughly equivalent to gross domestic product of Poland(gdp)

Concerns about the potentially adverse consequences of removing liquidity from ECB capture many banks and, by extension, European investors who were already scared by the sovereign debt crisis in the country club Med (Greece, Portugal, Spain and Italy ). These concerns are as much a testament to the severity of the banking crisis continues in the euro area over the lack of resolution thatcharacterized the handling of the fundamental problems of Europe. The banking problems in Europe before the crisis continues and even exposure to sovereign debt of the euro area to the U.S. subprime mortgage mess. The European banking crisis has its roots in two fundamental factors: the adoption of euro in 1999 and the general global credit expansion which began in the early 2000s. The combinationhas created an environment that has inflated the credit bubble around the continent, which were then grafted onto the structural problems of the European banking sector.

1. Local Subprime Bubble

The adoption of the euro: in fact, the very process of preparing to adopt the euro, which began in the early 90s by the signing of the Maastricht Treaty – has effectively created a creditbubble in the euro area. The cost of borrowing in the peripheral European countries (Spain, Portugal, Italy and Greece in particular) was significantly reduced due in part to the implicit guarantee that once they joined the euro zone debt would be as full as government debt of Germany
Essentially, countries allowed by adopting the euro as their access to credit from Spain to lower rates as theireconomies were never justified based on their own fundamentals. This has subsequently created a number of housing bubbles across Europe, but especially in Spain and Ireland. As an example, in 2006 there were over 700,000 new houses established in Spain – more than all the new houses based in Germany, France and the United Kingdom combined, although the UK has experienced a housing bubble of itsown then.

It could be argued that the Spanish case was especially egregious because Madrid has tried to use access to cheap housing as a way to integrate its large group of migrant workers in Latin America in the first generation of Spanish society. However Spain felt confident enough to try such a widespread social technology that shows just how far peripheral European countries felt they couldstretch their use cheap loans to euro. Spain now feels the pain of a collapsed construction sector, with unemployment approaching 20 percent and with the Spanish cajas (savings regional banks) wheeling their possessions to 58.9 percent of the mortgage market in the country. Debt outstanding real estate and construction sectors are equal to approximately 45 per cent of GDP.

2. Europe’s…