The Strategist

ECB: EU banks can't fully recover after 2008 crisis

05/30/2019 - 10:59

The banking system of the eurozone lagging behind the USA, Japan, Switzerland and the UK after 2008 may be the reason for a further slowdown in global economic growth - this follows from the latest review of the ECB’s financial instability. The ECB also lowered its forecast for growth in the euro area in 2019 to 1.1% of GDP. Future problems, however, are unlikely to cause a systemic banking crisis in the EU. In general, eurozone banks are still strong, but the “non-banking” nature of the development of the EU economy is increasingly obvious.

The latest Eurozone Financial Stability Survey, published by the European Central Bank (ECB), mainly focuses on changing the risks of the banking sector of the eurozone countries for 2018, although it also describes trends in the non-banking financial sector of the EU, macroeconomic risks of stability and - quite in the spirit of the EU - provides an overview of the risks associated with “global climate change”. Nevertheless, this is one of the most pessimistic recent ECB documents: the report de facto notes the relatively low progress of the eurozone’s financial sector in 2018. The consequences of the first financial crisis of 2008–2009, and then - with reference to the EU - of the “Greek” crisis, are fading away very slowly. There is a noticeable lag in the quality of the eurozone banking system in comparison with the banks of the United States, Japan, and Switzerland and the EU outside the euro zone. Because of this, the expected slowdown in global economic growth can cement this situation for years.

The ECB confirms the decline in the forecast for GDP growth in the euro area from 1.7% to 1.1% in 2019 and from 1.7% to 1.6% - in 2020 (that is, the reduction is assumed to be local, and the main problem in this area lies in the expected decline in the profitability of bank assets). The review also provides the model parameters of the “worst” scenario of a decline in global economic growth. The model describes eurozone GDP decrease by 2.7%, the USA - by 2.5%, and fall in the growth rates of emerging markets to 2.3%. Such a scenario threatens eurozone banks with a capital loss on a moderate scale (3.4%) and a decline in prices for European real estate by 11% with relatively stable unemployment (it grows stronger in the model, reaching 3.2% in the US). The ECB doesn’t believe there is a big threat in the national debt in the EU (except Italy and, to a lesser extent, Portugal). In most countries of the eurozone in recent years, the share of domestic government securities in assets has been declining.

In general, the ECB notes a systematic and more or less successful struggle of banks in the eurozone with the effects of two crises, including a reduction in the share of bad loans (NPL) on bank balance sheets. The regulator is worried about the fact that growth of some assets in 2018 is “difficult to estimate” (hard-to- value). These assets accounted to 13.9% of all assets of banks in the eurozone. However, valuation of both the assets and the bad loans is distorted by the introduction of IFRS-9 reporting standards. The threat to stability of the decline in bad loans coverage is now observed only in Ireland.