Of Special Interest
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- Juniper forecasts mobile money transactions will exceed 200 billion by 2024
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- Barclays/Cebr report challenges nation to think differently about wealth
- Fifth of UK investors looking to debt investment, new research reveals
- Regtech will play a more important role in PSD2, says Mitek
- Banks turn to Fintech partnerships to improve customer experience, finds Fraedom
- New industry code to tackle fraud must deliver, says Which?
- New TTF report highlights loss of trust in financial services
- Arxan highlights financial app vulnerability epidemic
- SAS asks whether banks really need to choose between operations and innovation
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- Financial wellness affects half of peoples’ mental or physical health, finds report
- Study finds traditional financial institutions embrace Fintech disruption
- Grass is greener for environmentally friendly businesses, finds Barclays
- Prospective homeowners would consider a 40-year mortgage to escape renting, finds Santander
- Millennials’ needs are changing the face of banking industry, says new report
- FS is putting consumer data at risk by failing to protect mobile apps, says Arxan
- A lack of belief in their ability holds 28% women back in work, says Cambridge & Counties
- ‘Which?’ reveals Scotland has lost over a third of its bank branches in eight years
- Next downturn unlikely to be as bad as 2008, according to S&P
- FCA reveals findings from first cryptoassets consumer research
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- Banks suffering major IT shutdowns every day, ‘Which?’ reveals
- The US will be a key offshore centre in 2019, says GlobalData
- Debit industry changes markedly in 10 years of the Debit Issuer Study
- UK's ‘Big Five’ face ‘too big to compete’ as small challengers secure stellar returns
- Banks as vulnerable now as before crash, says new study
- Leverage ratio a constant conundrum for European and US banks, says SNL
15th May 2015
Banks as vulnerable now as before crash, says new study
Eurozone banks are as vulnerable to failing today as they were in the run-up to the 2008 global economic crash and subsequent recession, new research has found.
In the first study to compare sources of systemic risk in Eurozone banks, economists found banks in southern countries, including France, Spain and Italy, are highly vulnerable to failure. Banks in northern countries appear to be more resilient.
Dr Nikos Paltalidis, University of Portsmouth Business School, led the research, which is published in the Journal of Banking and Finance. He said: “The results give a vivid picture of financial contagion and the domino effect in the banking sector. The risks are still substantial and a repeat of the last financial crisis is feasible.
"The banking industry has been grappling with ways of measuring and reducing systemic risk since the collapse of the Lehman Brothers bank in 2008. That collapse and subsequent worldwide recession was the canary in the mine, it showed how fragile the financial system was, and how quickly economic shocks reverberated.
“Our findings indicate that despite all the efforts to improve the resilience of banking, some banks are as vulnerable today as they were before the last banking crisis, they are just as likely to fail. In the case of a financial or economic shock, we found that banks would experience losses big enough to reduce their capital below the required regulatory minimum, because the quality of equity on the biggest European lenders is not sufficient enough to mitigate systemic crisis.”
The researchers modelled a range of inter-connected, dynamic economic shocks on 170 eurozone banks in 16 countries, and the spread of that effect to other countries from 2005-2013. The researchers used three independent channels of systemic risk – the interbank loan market, the sovereign credit risk market, and the asset-backed loan market – to test which banks were resilient and to track how shocks spread between domestic and international banks. Their models did not take into account any government or central bank interventions, such as bail-outs.
Dr Paltalidis said: “In theory, the new capital rules adopted by ‘systemically important’ banks should be able to endure a 10 per cent fall in the value of their assets before placing panicky calls to the central bank. Also, the euro area banking system seems to be fundamentally solvent, according to several stress tests. However, our study provides ample evidence that this hypothesis does not hold in practice, indicating that similar to the pre-2009 period, systemic risk is enormously underestimated once again.”
The findings include that although a shock in the interbank loan market triggers the highest expected losses, a shock in sovereign debt risk transmits fastest and causes a cascade of losses for other banks. The results reveal that a sharp rise in government borrowing costs would have a destructive ripple effect across the region’s financial institutions. The speed of contagion and the expected bank failures are markedly more prominent in the southern euro area banking systems.