Eurozone bank union still distant as crisis time nears, says Credit Suisse

Credit Suisse predicts “few large listed Eurozone banks would be left” if peripheral nations leave the bloc, but that achieving banking union in part to avert such a scenario is “extremely challenging given the fragmentation of the European banking system”.

The idea of a common banking regulator applying one Eurozone-wide set of rules is gaining momentum among Eurozone governments with the exception of Berlin’s.

But it remains far from being reality, according to the Swiss bank’s banking analysts.

“Having tried to reconcile balance sheets and banking businesses across Europe, we struggle with the concept of a single European regulator [which] we see as extremely unlikely,” Credit Suisse’s bank analyst team said in research published today.

It adds that the current monetary union without fiscal union is “unsustainable in the long term. We see monetary policy as key to buying time and removing short-term tail risk but, longer term, we only see this as part of the solution if we become more confident that a fiscal union will be achieved.”

The team adds other alternatives – such as a facility for the ECB/EU to recapitalise banks directly potentially via the ESM, deposit guarantee schemes or more cheap lending from Frankfurt – would “buy more time [but] we would still see these actions as not solving the problems”.

Credit Suisse’s team then sketches three scenarios for the Eurozone’s future, with the possible costs on banks of each outcome.

A devolvement of Greece, Ireland, Italy, Portugal and Spain would cost between €140bn and €470bn in capital shortfall for the European banks CS covers – equal to between one- and three-quarters of their market capitalisation.

As the banks prepare for the scenario there would also be contraction in credit of about €1.3trn, or 10% of total lending provision.

Some banks would see their tangible equity “largely wiped out [and] the magnitude of losses in this scenario is indicative of how unprepared the system is”.

This, however, is not as dire as Credit Suisse’s central thesis.

The analysts believe it most likely that no country leaves, but that European banks will still “significantly curtail” their amount of cross-order business within Europe.

Even under this scenario, Europe’s banks still lose €32bn, or 5% of the market cap of the major stocks Credit Suisse analyses. French banks, foremost Credit Agricole, suffer most.

But the analysts note this is “largely being discounted by the market at this stage – with the caveat that it is an orderly event”.

The analysts’ final scenario – no country exits, but banks reduce their cross-border lending nevertheless – brings a €28bn impact on equity.

“We see a range of €400bn to €1.3trn of credit availability in European retail and commercial loans being removed from the system, which is equivalent to 3% to 10% of total non-monetary financial institution (MFI) loans. The range of outcomes depends on how quickly banks retrench to their home markets and delever. This only takes into account the listed banks under coverage and so could be underestimating the overall impact,” Credit Suisse says.

 

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