European institutions are better armored for a crisis than they were in 2008, analysts say. But some still have doubts whether that armor is thick enough to withstand another big shock.
Despite progress in rehabilitating the financial system since then, analysts say, some gaps remain, among them the continued lack of any mechanism to deal with the failure of a large bank.
And while regulators have pushed banks to reduce risk, bolster their reserves and become less dependent on fickle short-term financing, the measures were designed to be phased in over a decade. As a result, they still fall short of what some experts, particularly in the academic world, consider adequate.
“We should have solved these problems of the banking sector well before the last few months,” said Harald A. Benink, a professor of banking and finance at Tilburg University in the Netherlands.
Numerous anxiety indicators, like emergency borrowing from the European Central Bank and the interest rates on short-term lending, have pointed to tension in the interbank lending market. In particular, there have been signs that some European institutions have had to pay more to borrow dollars.
“Without a doubt unsecured U.S. dollar funding markets have tightened somewhat recently,” Andreas Dombret, a member of the executive board of the Bundesbank, Germany’s central bank, acknowledged Wednesday. Money market funds in the United States “have become more selective when providing funding to nondomestic banks,” Mr. Dombret said.
But, like others who argue that fears of another crisis are overblown, Mr. Dombret says that banks are much better off than they were three years ago.
German banks, he said, have increased the capital they hold in reserve by about three percentage points since 2008, to an average of 12.6 percent of assets. That means they are better able to absorb losses if there is a surge in bad loans or the value of their government bonds declines.
“We are very far away from the situation we witnessed in 2008,” Mr. Dombret said during an appearance at a Bundesbank office in New York, according to a text of his remarks. “European banks, in general, have considerably improved their capital base, making them less vulnerable to financial strains.”
But some critics say that level of capital is still inadequate if there is another major crisis, especially for very large or interconnected banks that would spread destruction throughout the system if they failed.
Central bankers and regulators have made assiduous efforts to make the system less vulnerable to problems at these banks, known in regulatory jargon as systemically important financial institutions, or SIFIs. For example, the too-big-to-fail banks will be required to hold more capital in reserve than other banks. But in Europe few if any measures are in place.
“What we are doing is right, but it is taking too long,” said Renato Maino, a former executive in the risk management department of the Italian bank Intesa Sanpaolo, who is now a lecturer at the University of Torino. “We didn’t remove the main sources of our financial instability.”
Fear that another big bank failure is imminent may help explain why markets reacted so nervously when a single bank last week took advantage of a European Central Bank program aimed at preventing institutions from running short of dollars, as many did during the 2008 crisis. The unidentified bank borrowed $500 million for one week, the first time a bank tapped the central bank’s credit line since February.
The sum was big enough to suggest the borrower was a large bank with a substantial business in the United States — a SIFI, in other words.
Article source: http://www.nytimes.com/2011/08/26/business/global/gaps-remain-in-girding-europes-banks.html?partner=rss&emc=rss