When financial regulators say the European banking system is safe from another major crash they are talking about the funds banks can use to offset their losses.
The 31 biggest banks hold an aggregate €1tn (£700bn) of shareholder funds, and account for about 75% of the European banking system by assets. Across all banks, it’s fair to say the total equity reaches €1.35tn.
Total losses attributed to European banks in the last financial crash were around €1tn, so a repeat of the devastation caused in 2008 could be withstood by just calling on shareholders to sacrifice their equity.
If the crash cost more than €1tn, banks can call on the €8tn of debts to bondholders, which could be cancelled in part or in their entirety, freeing up cash from interest payments to safeguard depositors. This is a substantial extra buffer. No wonder officials in Brussels, European Central Bank head Mario Draghi and the UK’s regulator, the Bank of England, feel confident a taxpayer bailout will never again be required.
So it might seem odd that the International Monetary Fund has sounded a warning in its latest financial stability report about the parlous state of the European banking system.
It said more should be done to tackle the €900bn of non-performing loans on the books of eurozone banks. It also said there were too many banks chasing too little business and some should be wound up.
In Britain this warning might verge on the bizarre. The government wants more banks and has already pushed Lloyds, HSBC and RBS to take a tough line on bad loans. Looking back to 2009, we can see that the Labour government went further than almost all its European counterparts in separating banks from their bad loans to clean up the system.
But the IMF is not talking so much about the UK as Italy and other countries in the eurozone periphery. Italy has propped up a forlorn bunch of regional banks that have done little to tackle loans that will never be repaid. Zombie businesses that spend all their spare cash on interest payments, denying them the funds for investment, litter the Italian manufacturing sector, which remains vast.