I have always been suspicious about the balance sheets of national banks, especially when it comes to their net worth in the event of an emergency. These institutions are susceptible to world economic fluctuations and, in bad times, are invariably in need of extra capital that can amount to large sums of money.
A recovery of most banks across the EU is being held back by one trillion Euros – the equivalent of £837 billion – to cover bad loans over the past year, and a recovery in bad share prices, since an economic upturn is unlikely to fully restore the profitability of persistently weak banks.
The IMF’s global Financial Stability Report says the scale of bad debts and the failure of countries such as Italy, Greece and Portugal to deal with them impede the scope for recovery and would lead to a fresh financial crisis across the EU.
In a wide ranging report, the IMF experts also cautioned that there are several other risks on the horizon which would turn back market optimism and obstruct stability and recovery:
a) President Trump’s fiscal policy could push up global interest rates and force highly leveraged US companies to the wall.
b) Protectionist and populist policies could have a dampening effect on trade and growth, triggering an outflow of capital from emerging markets.
c) Credit in China has doubled in less than a decade to 200pc of total output, and if the boom lasts much longer, the more dangerous it will become.
IMF financial enforcers believe that Europe needs to follow Ireland and establish an agency to hold the bad debts of their banks, because until that happens there is little possibility of repairing them properly and getting them lending again. In particular, they argue that Europe’s domestic banks without overseas interests have the greatest challenge. It notes three-quarters of them had very weak returns in 2016.
But Europe’s global banks such as Deutsch Bank and Credit Suisse also underperformed compared to their fleet-of-foot American counterparts. The report shows British lenders have been more ruthless than their counterparts in scything branches with £728 million per branch, but this is still less efficient than Holland or Ireland. The lowest assets per branch are in Italy, Portugal and Spain.
The IMF says there are too many weak banks across Europe with low buffers, too many with a regional focus and narrow mandate or too many branches with low branch efficiency. The fund’s chief enforcer, Tobias Adrian, called for countries with the biggest challenges to address matters urgently, warning that low profitability could incite systemic risks.
Well, the situation will get much worse if political stability were to deteriorate should the current election in France turn sour, and the presidency bring forth a politician who will cause consternation and havoc of monumental proportions.
Luckily, Emmanuel Macron seems headed for victory. Let’s keep our fingers crossed!