Bad Prospects for European Banks?

According to Eric Dor, a Research Director at IESEG, a Business School in Lille, France, the potential losses for the European Banking system could reach $1,600 billion, of which 900 billion would be related to the euro zone.

The European banks turn out to be more dependant on emerging markets than American and Japanese Banks. They might have underestimated the extent of the depreciations. They are significantly exposed to American toxic assets.

The total loss of banks since the beginning of the crisis could attain $4,508 billion on assets from the United States and $898 billion on assets from the rest of the world. American banks would account for $2,212 of the amount and European banks would account for $1,607 billion of the worldwide loss.

The total asset of the banks from the euro zone equals 25,000 billion Euros, that is 2.7 times as much as the annual GDP of the zone. For the whole EU, this figure reaches 41,000 billion euros.

The leverage ratios are too high: 64.4 for Dexia, 59.1 for Deutsche Bank, 46.9 for UBS, 40.5 for Crédit Agricole, 36.1 for BNP or 30.3 for Société Générale.

Loans from European banks to Emerging markets attain, as a whole, 2.550 billion euros which is far more than the loans granted by American or Japanese competitors. EU banks have an exposure of $1,400 billion to the risk of Eastern Europe. And banks from Austria, Italia, France, Belgium, Germany and Sweden detain 84% of the loans.

Goldman Sachs, on March 25, 2009 assessed the potential losses of the Euro Zone banks at $922 billion, that is 10.1% of the Euro zone GDP, of which 1/3 has been recorded in the bank accounts. As a result, almost 600 billion euros of losses would remain to be recorded.

According to AGEFI data released in March 2009 European banks have already acknowledged 234 billion euros in losses since the beginning of the crisis. The equity of European banks only represents 1,000 billion euros after the new flow of capital of 293 billion euros, of which half was provided by the states.

Bloomberg, in January 2009, had evaluated the recorded depreciations at $296.9 billion and capital raises at $333.4 billion.

According to Goldman Sachs, the banks from Euro Zone have already depreciated the equivalent of 346 billion euros of which 117 billion euros represent depreciations for losses on loans, 109 billion euros represent losses on shares and 120 billion euros in foreign recognitions. 569 billion euros of additional asset depreciations might be recorded in the future.

Thus, the total amount of losses for the euro zone bank could be 915 billion euros, 528 in the euro zone entities and 387 in the subsidiaries outside the euro zone. In the euro zone, the losses are distributed as follows: 343 billions on domestic loans, 76 billions on loans to foreign debitors, 57 billions on stocks and 52 billions on debt instruments. The losses for exterior subsidiaries are concentrated in the American subsidiaries for 310 billion euros and Central and Eastern Europe for 77 billion euros.

In the EU, corporate debts reach 95% of GDP compared to 50% in the U.S. This indebtedness level raises concerns in the current economic climate.

The European banks are highly exposed to U.S. toxic assets: 20% of banks in the U.S. territory are subsidiaries of Euro zone banks and according to the IMF, the exposure of European banks equals 75% of that of the U.S. banks. Problem: the U.S. banks have already depreciated $738 billion whereas European banks would have recognized only $294 billion in depreciations.

The failure of AIG would have had a devastating effect on European banks because most of the CDS they had sold ( total: $500 billion covered issued by AIG ) to cover payment default was directed to European banks, that is $300 billion of credit.

Based on an article from Eric Dor from IESEG School of Management ( LEM-CNRS, Université Catholique de Lille ).