Europe’s Fragile and Bad-debt Ridden Banking System (Happy Columbus Day!

In honor of Italian explorer Christopher Columbus, here is review of Italian banks (as well as a benchmark, Deutsche Bank).

Here are two notable Italian banks: Uni Credit (a global systemically important bank – Bucket 1) and Banca Monte dei Paschi di Siena (a domestic systemically important bank).  And for comparison, my former employer Deutsche Bank. What do the three of them have in common? Yes, they all peaked in 2007 and all have plummeted since.

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By comparison, US banks have fared better since 2007 (although Bank of America looks the most “Italian”).

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What is the difference between US banks and European banks (notably Italian banks)?  European banks have close to 1 trillion euros worth of bad loans on their books. The ECB is attempting to get European banks to take reserves on bad loans. The only problem is that the new regulation applies only to loans that go bad after the start of 2018, leaving a decade of accumulated bad debts untouched.

According to Chris Whalen at Institutional Risk Analyst, Under current international accounting rules, EU banks can essentially ignore (and accrue interest) on bad loans. This makes published financials for EU banks completely useless for investors and credit rating agencies. More, just as “quantitative easing” in the US has not particularly helped either the resolution of bad loans or new lending, in the EU the opportunity created by ECB chief Mario Draghi’s efforts has been largely wasted. More public sector debt has been incurred and the banks – which admit to some €850 billion (6%) in non-performing loans – are essentially insolvent as a group.”

Even with the ECB purchasing more assets than The Fed for their balance sheet, European banks remain drowning in bad debt.

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Yes, even Christopher Columbus has acid indigestion at the thought of the bad-debt ridden Italian banks.

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