Risk of Bank Failures Rising in Europe, E.C.B. Warns

In a sober assessment of the state of the zone’s financial system, the E.C.B. said that a prolonged recession had made it harder for many borrowers to repay their loans, burdening banks that had still not finished repairing the damage caused by the 2008 financial crisis.

Last year “was not a good year for banks at all,” Vítor Constâncio, the vice president of the E.C.B., said Wednesday.

While the E.C.B., as customary, did not mention specific banks, it said the most vulnerable were those in countries with high unemployment or falling house prices. That list would include Italy, Spain, Greece and Portugal among others. But ailing banks are also a problem in stronger countries like Germany, where Commerzbank and publicly owned landesbanks, or state banks, are struggling with bad loans to the shipping industry and other problems.

Germany has drawn criticism for lecturing other countries on excessive government debt, while trying to protect its own banks from greater scrutiny. “They are very virtuous when they look at national accounts but less when they are looking at their own banks,” said Stefano Micossi, an economist who is director general of Assonime, an Italian business group.

The E.C.B. takes the pulse of the European financial system every six months, but the latest report, running 128 pages, has particular importance as the central bank prepares to become the supreme regulator of euro area lenders. The report also raised concerns about whether banks were systematically underestimating risk, and served as a reminder of the monumental task that lies ahead for the E.C.B. when it assumes its new powers next year.

A similarly dim snapshot of the state of the euro zone economy was issued Wednesday by the Organization for Economic Cooperation and Development in Paris. It warned of the dangers posed by weakly capitalized banks, a problem it said underlined the need for E.U. leaders to push through with a so-called banking union that would include centralized supervision of lenders.

The limited ability of European banks to absorb losses and the lack of a full banking union are potential threats to achieving a lasting stability, the O.E.C.D. said. Reduced tensions on financial markets seem to have dampened the desire to push for progress in creating joint banking mechanisms, it added.

“It is important to strengthen the capital of financial institutions so that they can withstand sovereign debt write-downs if rules prove insufficient to prevent sovereign crises,” the O.E.C.D. report said.

The O.E.C.D., based in Paris, predicted that gross domestic product in its 34 member countries, all of which have developed economies, would grow 1.2 percent this year, slightly below the 1.4 percent it forecast six months ago.

Unemployment, especially in Europe, remains a persistent problem contributing to the uneven pace of growth globally, the O.E.C.D. said. It warned European countries that failing to address the issue would undermine the progress made from the fiscal and structural adjustments that many countries have pushed through in recent years.

The E.C.B., as part of changes designed to avert future financial crises, will begin supervising the euro area banks sometime next year, depending on when changes in E.U. law are approved by the European Parliament. The E.C.B. has already begun preparing to assume the new powers.

The report issued Wednesday raised the question of whether the E.C.B. would be more willing than national regulators to require banks to confront problems like problem loans or other damaged assets. Many analysts say the euro area still has numerous so-called zombie banks, which are close to bankruptcy but have kept their losses hidden.

Melissa Eddy contributed reporting from Berlin.

Article source: http://www.nytimes.com/2013/05/30/business/global/risk-of-bank-failures-rising-in-europe-ecb-warns.html?partner=rss&emc=rss