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Europe’s Finance Ministers Start Negotiating Guidelines on Failing Banks

June 20, 2013 by Leave a Comment

LUXEMBOURG — European Union finance ministers on Thursday began to negotiate rules for rescuing or closing failing banks, regulations considered crucial to promoting financial stability in the region.

But the two-day meeting could be overshadowed by renewed concerns in Greece, where the crisis began. On Thursday, the International Monetary Fund and euro zone officials issued a thinly veiled warning that it could suspend aid to Greece by the end of July if the political turbulence prevented monitors from completing their review of the country’s finances. Olli Rehn, the European commissioner for economic and monetary affairs, expressed frustration that Greece was again undermining efforts in Europe to turn the page on its five-year crisis.

“I love Greece but I’m very much looking forward to a Eurogroup news conference where Greece is not going to be discussed and a summer where we don’t have any Greek crisis,” Mr. Rehn said at a news conference.

The urgency for transformative measures has largely ebbed since the European Central Bank calmed the markets by promising to buy bonds from troubled euro zone countries. But the surge of concerns about Greece underscored the need for the European finance ministers to secure deals — however modest — during the marathon negotiating session in Luxembourg.

A so-called banking union could help prevent a recurrence of the chaos that ensued during a bailout for Cyprus in March, when governments and international lenders argued over how to impose losses on investors in the country’s troubled banks. Such policies could also prove vital if banks reveal new vulnerabilities during the next round of so-called stress tests, which will most likely happen next year.

The goal of the ministers’ talks was to develop policies that “finally close the vicious circle between the banking crises and sovereign crises” and to “definitively put behind us the financial crisis that has weighed on Europe since 2008,” said Pierre Moscovici, the French finance minister.

The meetings could also allow the leaders of the Union’s 27 member states to endorse reform efforts ahead of their meeting next week in Brussels, their last scheduled session before the summer. Still, the meetings are likely to result in incremental steps, rather than transformative ones like creating a lender of last resort to guarantee government or bank debt. The meeting of the 17 ministers from the euro zone, called the Eurogroup, focused on determining the conditions under which countries could draw on a shared bailout fund to inject money directly into troubled banks.

Even though European Union leaders agreed to push forward that initiative a year ago, the ministers confirmed on Thursday night that this tool will not be available until the European Central Bank takes over the supervision of some of the bloc’s largest banks in the second half of 2014. But ministers agreed that up to 60 billion euros, or about $80 billion, could be drawn from the fund to rescue banks whose failure could have broad impact on the financial system.

The ministers also left open the possibility of recapitalizing banks that are already in trouble. “The potential retroactive application of the instrument will be decided on a case-by-case basis,” Jeroen Dijsselbloem, the president of the Eurogroup, said at a news conference.

That option is important for Ireland, which invested more than 30 billion euros, or about $40 billion, to rescue its banks during the crisis. The country is lobbying to use the bailout fund, called the European Stability Mechanism, to recapitalize the banks and relieve its debt.

“We’ve always argued that Ireland was an exceptional case,” Michael Noonan, the Irish finance minister, said at the meeting earlier on Thursday. “We’re not arguing this case for all our colleagues in the euro zone.”

The ministers decided to oblige countries to contribute 20 percent of any capital increase as a way to encourage governments to prevent mismanagement or losses at banks, a demand made by countries like Germany. When the meetings continue Friday, the finance ministers from all countries in the European Union will try to hash out a plan for shutting down troubled banks.

A central issue is the rules for imposing losses on a bank’s creditors, rather than putting the burden on taxpayers. Some countries, including Britain, are pushing to ensure that governments retain some flexibility. The worry is that automatic losses for some creditors could set off fears of losses at other institutions, which could start bank runs.

But for some countries, like Spain, where government finances are under severe strain, having a single rule book has become an important competitive consideration. Spain wants to ensure that bank investors do not flee to more prosperous countries like Germany, where mechanisms for resolving bank problems might be better capitalized and could be used to shield creditors from losses.

Article source: http://www.nytimes.com/2013/06/21/business/global/europes-finance-ministers-start-negotiating-guidelines-on-failing-banks.html?partner=rss&emc=rss

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Stress Tests Find Banks Are Healthier, Bernanke Says

April 8, 2013 by Leave a Comment

WASHINGTON (AP) — The Federal Reserve’s chairman, Ben S. Bernanke, said Monday night that the central bank’s annual stress tests of major American banks were better able to detect risks in the financial system. He said the tests showed that the banking industry had grown much healthier since the financial crisis.

Mr. Bernanke, in a speech, noted that this year’s tests showed that 18 of the biggest banks had collectively doubled the cushions they hold against losses since the first tests were run in 2009. He said the tests were providing vital information to regulators.

The latest test results were released last month. They showed that all but one of the 18 banks were better prepared to withstand a severe American recession and an upheaval in financial markets. The tests are used to determine whether the banks can increase dividends or repurchase shares.

Mr. Bernanke was speaking to a financial markets conference sponsored by the Federal Reserve Bank of Atlanta. In his prepared remarks, he said he viewed the first stress test conducted in 2009, months after the financial crisis struck, as “one of the critical turning points in the crisis.”

“It provided anxious investors with something they craved: credible information about prospective losses at banks,” he said.

Mr. Bernanke said that since the financial crisis, in the ensuing years, the Fed had worked to improve the stress tests so they could serve as a resource for banking regulators to monitor and detect threats to the financial system.

The stress tests have been criticized by some banks because the central bank has kept secret the full details of the computer models it is using to evaluate each bank. The Fed has defended this practice. It has argued that it is similar to teachers not giving students specific questions that will appear on a test to guard against students memorizing the answers.

“We hear criticism from bankers that our models are a ‘black box’ which frustrates their efforts to anticipate our supervisory findings,” Mr. Bernanke said. He said that over time, the banks should better understand the standards the tests are measuring.

In this year’s test, the Fed approved dividend payment plans and stock repurchase plans for 14 of the 18 banks outright.

Two of the banks, JPMorgan Chase and Goldman Sachs, were told by the Fed that they could proceed with their plans, but would need to submit new capital plans. Two other banks, Ally Financial and BBT, were forbidden by the Fed to go through with their dividend increases and stock buybacks.

Ally Financial, the former financing arm of General Motors, fared the worst on the stress test. The Fed’s data showed that Ally’s projected capital level was below the minimum the Fed thinks a bank would need to survive a severe recession. Ally officials said they believed that the Fed’s testing models were unreasonable.

BBT, based in Winston-Salem, N.C., said it would resubmit its capital plan and that it believed it would be able to address the factors that had led to the Fed’s objections.

Article source: http://www.nytimes.com/2013/04/09/business/stress-tests-find-banks-are-healthier-bernanke-says.html?partner=rss&emc=rss

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DealBook: Banks Pass Fed’s Tests; Critics Say It Was Easy

March 8, 2013 by Leave a Comment

Ben Bernanke, chairman of the Federal Reserve, at a House panel last month.Carolyn Kaster/Associated PressBen Bernanke, chairman of the Federal Reserve, at a House panel last month.

9:00 p.m. | Updated

Four years after the financial crisis, federal regulators said that many of the nation’s largest banks were better prepared to sustain future market shocks, paving the way for the healthiest institutions to increase their dividends and buy back shares.

The results of so-called stress tests, released on Thursday by the Federal Reserve, indicate that most large banks would survive a severe recession and a crash in the markets. The tests, which measured a bank’s capital levels during adverse conditions, help validate the government’s efforts to shore up the financial systems.

But some analysts contend that the Fed was still too lenient with the banks. The stress tests, they argue, underestimate potential losses and the effects of several major financial firms collapsing, which can paralyze the entire system.

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“The stress tests were just not very stressful,” said Rebel A. Cole, a professor of finance at DePaul University.

With the industry’s health improving, analysts predict that most big banks will now secure the Fed’s blessing to return money to shareholders, including some unexpected candidates. Citigroup, for example, outperformed its rivals in the test just one year after a poor performance embarrassed the bank and thwarted its plans to distribute capital to shareholders.

This year, Citigroup did not wait long to celebrate. Minutes after the results were released, the bank announced that it asked the Fed’s permission to carry out $1.2 billion in stock buybacks through the first quarter of 2014.

Other banks did not fare as well. Ally Financial, which is majority-owned by the taxpayers since the crisis, burned through nearly all its buffer under the test, which assessed how much capital would remain at the end of 2014 once banks were subjected to hefty losses.

Morgan Stanley and JPMorgan Chase also produced some of the lowest capital results among large Wall Street firms. Goldman Sachs would suffer $25 billion in trading losses under the test. The results were not unexpected; all three firms have significant trading operations that can rack up big losses in turbulent times.

The test results provided an important snapshot of the financial system more than four years after the banking industry was on the brink of collapse. Regulators hailed the industrywide improvements, underscoring what they portend for consumers and the economy.

“The stress tests are a tool to gauge the resiliency of the financial sector,” a Federal Reserve governor, Daniel K. Tarullo, said in a statement. “Significant increases in both the quality and quantity of bank capital,” he said, helps “ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.”

Investors will pore over the results, scanning for hints about how much money banks can return to shareholders. After the crisis, regulators prevented lenders like Citigroup and Bank of America from increasing their dividends or repurchasing shares, forcing them instead to hoard capital to absorb losses.

Behind the scenes, the Fed will now signal to each bank whether it can proceed with new payout plans, potentially creating a tense face-off with regulators. If the Fed objects, a bank will have an opportunity to temper its proposals for dividend payments and share buybacks before the plans are released publicly next Thursday.

The stress tests have already caused tension between regulators and banks. The results, which reveal in some detail the losses that banks will suffer under times of stress, prompted wrangling with the Fed over how to conduct the tests and how much data to release.

In another sign of friction, the banks had to run the same test as the Fed — and in some cases produced rosier results. Wells Fargo reported a projected 9.2 percent Tier 1 common ratio, the primary measure of financial strength tracked by regulators, by the end of 2014. That was far higher than the 7 percent calculated by the Fed.

Bank of America’s outlook also trumped regulators’ findings, while Citigroup’s forecast hewed closely to the Fed. Those sorts of discrepancies may feed suspicions that financial firms are overly optimistic about their businesses.

In its overhaul of the regulatory system after the crisis, Congress mandated stress tests to provide an annual health check for the same banks that brought the economy to its knees. The Fed’s tests take banks through a series of adverse conditions, not unlike the last crisis. The tests estimated that 18 banks sustain combined losses of $462 billion, in a period of considerable financial and economic stress in which unemployment soars, stock prices halve and house prices plummet more than 20 percent.

But, to some banking analysts, the tests did not fully capture some forces and events that occur during economic and market shocks. For instance, Wall Street firms may lose access to short-term loans critical to their survival. It is almost impossible to project the impact of the rapid collapse of one or two large financial firms, as in 2008, when Lehman Brothers and American International Group imploded.

Mr. Cole of DePaul said the projected losses on loans appeared too low for the severity of the imagined cases. “If we really had an economic crisis of this magnitude, the loss rates would be at least double on the real estate loans,” he said.

The numbers also show that, over the last year, the Fed has cut its loss projections for certain types of loans. Last year, it projected a 9.5 percent loss rate on Wells Fargo’s mortgages, but this year that dropped to 7.1 percent. The Fed declined to comment on specific banks, but a senior official said lower loss rates were the result of an improvement in the overall quality of the banks’ loan portfolios.

Still, some analysts cheered the results, saying they confirmed the increasing optimism among investors. Bank stocks have risen sharply in recent months, gains that could continue on the heels of the stress tests.

“It’s a very good exercise to do, showing everyone that the U.S. banking system is well capitalized,” said Gerard Cassidy, a banking analyst at RBC Capital Markets.

In a surprise, Citigroup had a projected capital equivalent to 8.9 percent of its assets at the end of 2014, well above last year’s showing. Bank of America’s so-called Tier 1 common capital ratio registered at 6.9 percent, also an improvement.

But Morgan Stanley’s ratio came in at 6.4 percent, temporarily restrained by its purchase of the remaining stake in the Smith Barney retail brokerage joint venture. JPMorgan’s capital levels stood at 6.8 percent. While those banks’ stress test results are lower than rivals, they are still strong capital numbers amid a crisis.

On one important alternative measure of capital, Goldman Sachs had a poor showing compared with its peers. Under the stressed case, the bank’s Tier 1 leverage ratio — another measure of capital strength that treats assets more conservatively — would fall to a low of 3.9 percent.

This could become an issue in any discussions between Goldman and the Fed about the bank’s capital plan. When regulators assess whether a bank can proceed with its capital plan, the Tier 1 leverage ratio cannot fall below 3 percent. Goldman’s own test showed the ratio falling to only 5.1 percent.

Article source: http://dealbook.nytimes.com/2013/03/07/feds-stress-tests-point-to-banks-improving-health/?partner=rss&emc=rss

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Global Markets Treading Water

July 15, 2011 by Leave a Comment

LONDON — Global shares traded in narrow ranges Friday as investors braced for the results of stress tests on European banks intended to show how they would weather another sharp recession. But Wall Street looked set for a higher opening after Citicorp announced better-than-expected earnings.

The European stress tests are meant to show the banks’ exposure to shaky government bonds, currently a big source of uncertainty for markets as Greece looks increasingly likely to default on its debt.

The European Union hopes the transparency will build confidence in stronger banks and push weaker ones to raise new capital, merge or restructure.

But traders were cautious, since the results wouldn’t be released until after European markets close for the weekend. The FTSE index of leading British shares was down 0.1 percent at 5,840, while Germany’s DAX lost 0.3 percent to 7,195. France’s CAC 40 fell 0.5 percent to 3,734.

Investors seemed unmoved so far by a Standard Poor’s warning that it might downgrade its credit rating on United States’ debt. President Barack Obama is locked in a battle with Congress over raising the debt ceiling — necessary if Washington is going to meet its obligations.

After days of falling against the euro, the dollar was flat, and the yields, or interest rates, on 10-year Treasuries barely budged.

“The Treasury market is positively Teflon when it comes to the debt mountain in the U.S.,” said Jane Foley of Rabobank. “Even if the Treasury market remains immune to what is a potential debt crisis in the U.S., it is clear that there is little left in the public purse to stimulate growth and jobs creation.”

The Dow Jones industrial average fell Thursday after remarks from Federal Reserve Chairman Ben S. Bernanke dimmed hopes for a third round of monetary stimulus.

Citigroup said it turned a profit for the sixth straight quarter as losses from failed loans declined. Net income rose 24 percent to $3.3 billion, or $1.09 cents per share, on revenue of $20.6 billion.

Oil prices fell to near $95 a barrel after Mr. Bernanke’s comments. But benchmark oil for August delivery was up 12 cents to $95.81 a barrel in electronic trading on the New York Mercantile Exchange.

Trading earlier in Asia was also muted. Japan’s Nikkei 225 stock average gained 0.4 percent to close at 9,974.47, recovering slight losses with investors largely on the sidelines. Monday is a national holiday in Japan.

Hong Kong’s Hang Seng lost 0.3 percent to 21,875.38 while South Korea’s Kospi rose 0.7 percent to 2,145.20. The Shanghai Composite Index added 0.4 percent to 2,820.17.

In currencies, the euro was virtually unchanged for the day at $1.4148.

Article source: http://feeds.nytimes.com/click.phdo?i=bd4158255807cd1871af3680a5d8f9f5

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E.U. Vows to Back Banks That Fail Stress Tests

July 13, 2011 by Leave a Comment

The results of the stress tests, which are scheduled to be released on Friday, could pose a headache for the 27 European Union finance ministers who met here to discuss ways to ease the region’s financial turmoil.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said that once vulnerable banks were identified they “must recapitalize themselves, or be recapitalized or restructured.”

In a statement, the finance ministers said that backstop mechanisms would aid struggling banks.

“These measures privilege private sector solutions but also include a solid framework for the provision of government support in case of need, in line with state aid rules,” the statement said.

Officials insist that the exercise is more stringent than tests done last year, which failed to reveal a looming banking crisis in Ireland. The new tests will include a review of how lenders would handle a 0.5 percent economic contraction in the euro zone in 2011, a 15 percent drop in European stock markets and potential trading losses on sovereign debt.

The officials insist that Europe’s banks and governments are better prepared this time around.

Jacek Rostowski, the finance minister of Poland, which holds the European Union’s rotating presidency, argued that Europe now had “a banking system that is in much better shape than it was last year.”

A fresh example of the stress that banks will need to endure came late Tuesday. Moody’s Investors Service cut Ireland’s credit rating to junk status, adding it to Portugal and Greece on the list of euro area countries whose ratings are below investment grade.

Ireland’s rating was lowered to Ba1 from Baa3, and Moody’s signaled that the country faced further downgrades in the next year. Standard Poor’s and Fitch Ratings still have an investment grade rating for the country.

Moody’s said Ireland would most likely need another bailout and that policy makers would force the private sector to shoulder some of the burden.

“The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt,” the company said in a statement. “This is a key factor in Moody’s ongoing assessment of debt-burdened euro area sovereigns.”

After the downgrade, the Irish agency that manages the country’s debt said that it had sufficient money from the country’s first bailout to cover its financing requirements until the end of 2013.

The downgrade of Ireland was certain to raise investor fears that the Greek debt crisis would spread. European officials raised the stakes on Tuesday by pressing for an emergency meeting of euro zone leaders on Friday, the same day that the stress test results are expected to be announced.

The plan represents a risky gamble by Herman Van Rompuy, the president of the European Council. If the meeting is held on schedule and fails to answer the crucial questions about Greece that were left unresolved by European finance ministers on Monday and Tuesday, it could end up unsettling the markets even more.

A gathering of finance ministers from the 17 countries that use the euro ended on Monday with a declaration suggesting that their bailout fund would be expanded and could be used to buy sovereign bonds from Greece and other deeply indebted countries.

That kind of declaration —rejected months ago because of German objections — has forced its way back onto the agenda because of the growing turmoil in the financial markets and fear that Spain and Italy could also be victims of Europe’s debt crisis.

As the meeting on Monday was getting under way, George A. Papandreou, the Greek prime minister, sent a letter to Jean-Claude Juncker, the prime minister of Luxembourg who leads the group of euro zone finance ministers. The letter was made public on Tuesday.

“If Europe does not make the right, collective, forceful decisions now,” he wrote, “we risk new, and possibly global, market calamities due to a contagion of doubt that could engulf our common union.”

“ ‘Crunch time’ has arrived,” he added, “and there is no room for indecisiveness and errors.”

Niki Kitsantonis contributed reporting from Athens.

Article source: http://feeds.nytimes.com/click.phdo?i=dc7ab2a37add76bec2ff9b5bf692d5b0

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DealBook: Commerzbank to Repay $20.4 Billion of German Bailout

April 6, 2011 by Leave a Comment

Commerzbank said it would repay most of the aid it received from the German government in 2009 and sell new shares to investors as it seeks to strengthen its capital reserves and comply with new banking regulations.

The move comes as German banks face criticism that they have not done enough to deal with problems left over from the financial crisis and become self-supporting businesses again.

“We are keeping our promise of repaying the temporary assistance from the German government as quickly as possible,” Commerzbank’s chief executive, Martin Blessing, said in a statement. German taxpayers will not suffer any loss, he said.

Like Germany’s publicly owned landesbanks, Commerzbank, a commercial lender, has counted government aid known as “silent participations” as part of its capital reserves. New banking regulations will compel banks to phase out such funds as a component of the most durable form of capital buffer, requiring them to raise funds from other sources.

Commerzbank may also be addressing the risk that banks which depend too much on silent participations would have trouble passing an examination of European banks that regulators plan to conduct in June. The European Banking Authority has been considering whether to allow the state aid to count toward core capital for the purposes of the so-called stress tests.

The banking authority is expected to announce by the end of the week how it will treat silent participations, an issue that has been closely watched in Germany.

Representatives of landesbanks have complained that a narrower definition of capital would unfairly hold them to a regulatory standard that does not begin to take effect for several years.

In its statement, Commerzbank said it would repay 14.3 billion euros ($20.4 billion) of its 16.2 billion euros in government silent participations. The bank, based in Frankfurt, plans to raise 8.25 billion euros by selling new shares in an offering to be completed no later than June. In addition, the bank began selling notes on Wednesday that will convert to new shares in May.

The German government, however, will continue to hold veto power over Commerzbank’s decision-making. The government, which took a 25 percent stake as part of the bailout, will maintain that ownership share by converting some silent participations to stock. Once converted to ordinary shares, the funds would qualify as so-called core Tier 1 equity, considered the most durable form of capital buffer.

Once all the transactions are complete, Commerzbank’s core Tier 1 equity will be 8.8 percent of assets, the bank said. New regulations to take effect at the end of 2018 require a capital buffer of 7 percent, though banks considered too big to fail — a category that could include Commerzbank — might be required to hold additional reserves to protect them against market shocks.

Mr. Blessing expressed gratitude to the German government for supporting the bank in the financial crisis that followed the collapse of investment bank Lehman Brothers in 2008.

“The government reacted courageously and quickly following the Lehman collapse,” he said.

Article source: http://dealbook.nytimes.com/2011/04/06/commerzbank-to-repay-20-4-billion-of-german-bailout/?partner=rss&emc=rss

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Tests Show Irish Banks Still Ailing

March 31, 2011 by Leave a Comment

Just months after a banking collapse forced an 85 billion euro ($120 billion) rescue package for the country, the Irish central bank is expected to announce on Thursday that the latest round of stress testing shows that the nation’s banks may need 13 billion euros to cover bad real estate debt. On top of the 10 billion euros already granted by Europe and the International Monetary Fund for the banks, that would bring the total bill for Ireland’s banking bust to about 70 billion euros, or more than $98 billion.

Some specialists say the final tally could be closer to $140 billion, an extraordinary amount for a country whose annual output is $241 billion. Trading in shares of Irish Life and Permanent, the only domestic bank to have avoided a state bailout, was suspended Wednesday after reports that it might have to seek government aid as well.

Dermot O’Leary, chief economist for Goodbody Stockbrokers in Dublin, says that Ireland can no longer afford to shoulder the still-growing burden of its banks. The nation’s interest payments are set to rise to 13 percent of government revenue by 2012 — a figure that trails only Greece’s 18 percent, Mr. O’Leary wrote in perhaps the most definitive report to date on Ireland’s financial ills.

“The Irish stress tests will be an important call to arms that shows that it cannot keep putting up the cost for recapitalizing its banks,” he said. “You need burden-sharing with the bondholders. Without that, the debt becomes unsustainable.”

Many proposals have been put forward to deal with the issue, including requiring bondholders to share in losses, as Mr. O’Leary and the new Irish government suggest, and a United States-style stress test with teeth, which would name and shame front-line banks and require them to raise capital.

But European governments have stuck to their position that such measures would further fuel investor fears, rather than calm them.

The second stress test of European banks now under way is beginning to be regarded as too weak, much as the first one was. In the meantime, the condition of the banks is worsening.

In Spain, which is having a brutal housing bust like Ireland’s, fresh data shows that problem loans are growing at their fastest level in a year.

And Portuguese and Greek banks, with their Irish counterparts, have become dependent on short-term financing from the European Central Bank for their survival as their economies deteriorate and doubts increase about their ability to repay their debts.

“Europe hesitates to deal with the banking problem for two reasons,” said Daniel Gros, the director for the Center for European Policy Studies in Brussels.

“Our policy makers saw Lehman and want to avoid a repeat of the experience at any cost,” he said, referring to the collapse of Lehman Brothers in September 2008. “And the weak banks in Germany and elsewhere are too politically connected to fail.”

Irish taxpayers have been left responsible since the government guaranteed all the liabilities of its banks two years ago.

The European Central Bank and the International Monetary Fund have refused to accept the notion that investors who bought the bonds of Irish banks, in effect financing their reckless lending, should share the pain with some loss on their holdings.

But a newly elected government has become more vocal in arguing that $29 billion in unsecured senior debt — which is not tied to an asset and as a result is deemed riskier from the start — is ripe for restructuring because the banks that issued it, like Anglo Irish, have essentially failed and been taken over by the government.

So the government should not be obligated to keep paying interest.

It is not clear who owns the senior Irish debt; analysts guess it is a mix of European banks and bargain-hunting hedge funds.

What is clear is Europe’s opposition to imposing reductions in the value of these bonds, often called haircuts. That view was reaffirmed this week when a central bank board member, Jürgen Stark of Germany, described such a move as populist and one that could feed a wider investor panic.

Should investors respond by driving down the value of government bonds from the weaker euro zone economies, the pain would most likely be felt by all. The Continent’s big banks in particular would suffer because many have large piles of sovereign debt, which has yet to be marked down to its market value.

According to Goldman Sachs, European banks hold $270 billion in Greek, Irish and Portuguese bonds.

Greek banks are the most exposed, with $87 billion, mostly in Greek debt, but German banks hold $62 billion in total and French banks $26 billion. Hypo Real Estate, a commercial lender now wholly owned by the German government, is the largest holder of Irish sovereign debt, with $14.5 billion.

With bank lending growth negligible and capital levels thin, especially in the weaker euro zone economies, a fresh round of write-offs is the last thing governments want.

The problem is compounded because banks account for a much larger share of national economies in Europe than they do in the United States.

In Ireland, bank assets are 2.5 times the size of its economy. A recent review of the European banking sector by Morgan Stanley shows that the rest of Europe is also heavily reliant on the health of its banks.

The five largest banks in Britain are 3.5 times the size of the country’s economy, 4.4 times in the Netherlands, 3.25 times in France and two times in Spain. In Germany, the figure is 1.5 times gross domestic product, but that excludes the biggest, Deutsche Bank, which is mainly an investment bank. (The comparable figure for the United States is 60 percent of economic output.)

Spain has managed to separate itself from the malaise surrounding Portugal and others this year by undertaking some aggressive deficit cuts.

But, according to a report this week by Marcello Zanardo, an analyst in London for Sanford C. Bernstein Company, Spain’s problem loans rose 3.3 percent in January from December, the biggest increase in a year. That brought its bad loans to a 17-year high of 6.06 percent of its portfolio. Nonperforming loans jumped 48 percent in 2009 and 15 percent last year, Mr. Zanardo’s data show, driven by the continuing weakness in Spanish home prices.

While Spanish banks are not in as bad shape as their Irish peers, the government has not yet convinced investors that it has addressed the problem despite steps to force local savings banks to raise capital.

Veterans of the three-and-a-half-year bank crisis in Ireland say that the hardest part is accepting how bad things really are, then taking definitive action.

“We need to accept once and for all that Ireland has 100 billion euros in irrecoverable bank loans,” said Peter Matthews, a financial consultant and recently elected member of Parliament who has long argued that Ireland and Europe are underestimating the scope of the country’s debt problem. “People do not relish a write-down but it is the right way to deal with this.”

Article source: http://www.nytimes.com/2011/03/31/business/global/31bank.html?partner=rss&emc=rss

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