The ECB issued its semi-annual Financial Stability Review over the weekend. The central bank warned that “With pressure on governments to consolidate their balance sheets, disengagement from financial sector intervention means that banks will need to be especially mindful of the risks
that lie ahead. In particular, they should ensure that they have adequate capital and liquidity buffers in place to cushion the risks should they materialise.”
The agency went on to say that banks in the region face $110 billion in net write-downs this year because of financial trouble in the region.
The first problem of the planned withdrawal of government stimulus has been well-described. Europe faces significant slow-downs in national GDPs, which along with historically high unemployment, may push the region back into recession. It has also been well-cataloged that the ripple effects on US and China exports will be damaging to the GDP recovery in those nations.
I European banks face losses as the EU financial situation falls apart, the risk is not only to banks based inside Europe. US banks have tremendous exposure in Europe, from sovereign debt and commercial relationships with financial firms in the region. A risk of $110 billion to European bank balance sheets means similar-sized risks in the US.
The irony of the bank problem is that European and US banks will face more bailouts, just as their governments have put in place back-stops of “too big to fail”, banks taxes, and “living wills.” Those regulations may not even have a chance to be voted into law before another wave of losses creates the need for new TARP-like funds on both sides of the Atlantic. The burden on the treasuries in the effected nations may be of similar magnitude to national stimulus packages which brings that problems full circle.
Nations that will not bail out their economies may be left to prop up their banking systems again.
Douglas A. McIntyre