Eurozone banks still ‘likely to fail’

Research shows that European banks are as vulnerable as they were in pre-2008 global economic crisis

Photo by: Reuters
Photo by: Reuters

Updated Jul 28, 2015

According to Portsmouth University Business School's press release, comparing the sources of the systemic risks finds that European banks are still under the threat of collapsing as they were before the 2008 crisis, when Lehman Brothers and some eurozone banks defaulted, 

“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,” says Dr. Nikos Paltalidis, lead researcher of the study published in the Journal of Banking and Finance. 

The banking industry is trying hard to measure and reduce the systemic risks since the Lehman Brothers’ collapse and global crisis. But according to Paltalidis this was just an indication of a bigger threat.

“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 reverberate,” says Paltalidis.

Dr. Paltalidis and his team of economists used dynamic economic shocks and its spread to other countries between 2005 and 2013 to model 170 eurozone banks in 16 countries.

To see which banks were resilient and the contagion between local and international banks, the economists examined the three independent channel of systematic risks – the interbank loan market, the sovereign credit risk market and the asset-backed loan market. Government or central bank interventions are excluded in the study.

While a shock in the interbank loan market results the highest expected losses, a shock in sovereign debt risk spreads fast and triggers numerous losses for other banks, according to the findings of the study.

The results showed that a rise in government borrowing costs is highly correlated so the effect would be destructive on the region’s financial institutions.

Southern eurozone banking system such as France, Italy and Spain seems more vulnerable to anticipate in bank failures and the speed of contagion is more significant in that area.  

“The eurozone banking system seems to be fundamentally solvent, according to several stress tests,” says Paltalidis.

“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.”

TRTWorld and agencies