The scars of Greece's debt crisis were laid bare in heavy losses from a string of European banks on Thursday, and bosses warned the region's precarious finances would continue to threaten economic growth and earnings.This warning of a threat to economic growth is entirely self serving for the bank bosses. Even though no linkage actually exists, the threat ties together the level of bank earnings and economic growth.
This blog has documented several examples of financial institutions incurring losses, having negative book capital and continuing to make loans to support economic growth. These examples include the US Savings and Loans in the mid-1980s.
From France to Germany, Britain to Belgium, four of the region's biggest banks lined up to reveal they lost more than 8 billion euros last year from their Greek bonds holdings.
"We are in the worst economic crisis since 1929," Credit Agricole chief executive Jean-Paul Chifflet said...According to the NY Fed, the solution that the FDR Administration came up with for breaking the back of the economic crisis that began in 1929 was to force banks to stop hiding and recognize their losses.
Europe's banks have already written down billions of euros from losses on Greek government bonds and loans, and a deal agreed this week with its creditors will inflict losses of 74 percent on bondholders.
"We can't say that the writedowns are over," said Franklin Pichard, director at Barclays France. "Even if some can say that the worst is over, we are only at a new stage in terms of provisioning and not necessarily at the end."...
Problems in Europe's banking sector are far wider than Greece....
The region's banks are still repairing the damage of the financial crisis and shrinking their assets. They must also find 115 billion euros by the middle of this year to shore up their balance sheets against future shocks. But any weakening in the economy will hit earnings and make that harder to achieve....As this blog has repeatedly observed, requiring banks to build up their book capital before they have been required to recognize all of the losses hidden on and off their balance sheet is bad policy.
It does not restore confidence in the banking system.
It does reduce the availability of credit as banks restrict the amount of new lending consistent with achieving higher Tier I capital ratios.
European governments are hoping to avoid more state bailouts to prop up the banking sector, and to limit the fallout should any bank collapse.As has been shown since the adoption of the Japanese model at the start of the bank solvency crisis, bailouts are a frequent occurrence. Take Dexia as the latest example.
It is in fact the Japanese model that links the book capital level of the banks to sovereign debt.
Under the Japanese model, bank book capital levels are protected. This introduces the notion that if bank book capital drops below a certain level the state must invest funds to boost the book capital level.
Under the Swedish model, European government would not have to do any more state bailouts.
The Swedish model recognizes that between deposit insurance and access to liquidity through the central bank, depositors do not need to worry about getting their funds back. As a result, banks with negative book capital can remain in business until regulators close them down --- see US Savings and Loan example above.
Since banks with negative book capital can remain in business, there is no need for state bailouts.