Unfinished business (2): European banks

The latest quarterly review of the Bank of International Settlements (BIS) compares today’s European sovereign debt crisis with the 2007-2009 financial crisis. The BIS understands the European crisis as similar to the early phase of the credit crunch, in 2007.

In a similar vein to the post below about US banks needing to restructure, the BIS notes that investors have become concerned about concealed, unresolved losses in European banks.  According to the BIS, French and German banks had exposures of $958 billion to Greece, Spain, Ireland and Portugal – a large proportion of their capital.

As the leader in today’s Financial Times argues, "there is a need to restrore confidence in banks":

Concern about the likely scale of losses is spooking the markets – just as in 2007 and 2008. The policy response has not yet addressed this.... Crystallizing the losses is the only way to restore confidence. Even if the figures are bad they will not be as bad as the market’s darkest imaginings.

In Europe and the US, trying to avoid losses is only causing more uncertainty, which impedes recovery.