#ActiveAllocator Research- responding to WSJ article today Tue, May 26, B1 ‘European Banks Exposed to Sudden Downturn’. We examined the events affecting the European Banking sector during the 2008 crisis and identified key drivers of recovery. They raised capital, increased liquidity, reduced their U.S. structured credit exposure and relied on the economy to recover to reduce non-performing loans. We opine that they now need to build capital (and cut balance sheets) from recent levels, take account of an increasing level of loan losses, not just from problems emerging to date from the crisis, but over the course of a developing economic down-turn.
While governments have rightly stood behind European banks, these banks are still in a weaker position, relative to their American counterparts, due to past capital policy – with the shock of coronacrisis led events posing risks to damaging market confidence and trust. The effective closure of mainstream sectors of economy is a major issue for banks, and may call for further intervention. In the longer term banking models are likely to change (a reversion to tradition?) under taxpayer-shareholder and regulatory pressure – but reforms need to be introduced at a measured pace for fear of further unbalancing.