Large European banks continue to hoard cash at central banks

The Wall Street Journal reports that large European banks continue to hoard cash at central banks.  The reason for doing so is it is:

a move that reflects their lingering fears about the financial system despite signs of improvement.

Here we are five years after the beginning of the bank solvency led financial crisis and banks still cannot answer the questions highlighted by the Financial Crisis Inquiry Commission:

• Which banks are solvent; and
• Which banks are insolvent.

As your humble blogger has discussed at length, if banks with deposits to lend cannot tell if the banks looking to borrow are solvent, they simply will not lend.  This is easily shown by the fact that the unsecured interbank loan market has been effectively frozen since the beginning of the financial crisis.

What does it take to unfreeze the unsecured interbank lending market?

Requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.  

With this information, banks with deposits to lend can independently assess the solvency of the banks looking to borrow and the probability that they will or won't be repaid.  Based on this assessment, banks with deposits to lend can adjust both the amount they are willing to lend and the price at which they are willing to lend to the risk of the borrowing bank.