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Europe threatened with banking casualties (2)

(Shanghai Daily)

08:21, August 29, 2011

In the meantime, the European Council continues, as the Americans would put it, to "kick the can down the road." Of course, the can is not in the road; it is in the banking parlors. EU banks are holding sovereign debt that clearly is not worth 100 cents on the euro. But even the financial "stress tests" conducted by regulators did not require the banks to acknowledge that inconvenient truth.

Many eurozone banks have made far less progress in strengthening their capital adequacy and liquidity than have American and British banks since the financial crisis erupted. The disparities were exposed in the IMF's last Global Financial Stability Report, published in April, which contains a striking analysis that shows the changes in tangible common equity over the last two years, and the degree to which banks are reliant on wholesale funding. One EU central banker described this to me as the "killer chart."

What it shows is that banks in the United States have increased their equity from about 5.5 percent to about 7.5 percent, and have reduced their reliance on wholesale funding from 30 percent to 25 percent. British banks have made less progress with tangible common equity, rising from just under 3 percent to a little over 4 percent, but they have reduced their reliance on wholesale funding, from almost 45 percent in 2008 to less than 35 percent now.

By contrast, eurozone banks have almost stood still on both indicators.

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