Eurozone Banking System On The Edge Of Collapse

By Harry Wilson
Telegraph News

Senior analysts and traders warned of impending bank failures as a summit intended to solve the European crisis failed to deliver a solution that eased concerns over bank funding.

The European Central Bank admitted it had held meetings about providing emergency funding to the region’s struggling banks, however City figures said a “collateral crunch” was looming.

“If anyone thinks things are getting better then they simply don’t understand how severe the problems are. I think a major bank could fail within weeks,” said one London-based executive at a major global bank.

Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding. “The system is creaking. There is a large amount of stress,” said Anthony Peters, a strategist at Swissinvest, pointing to soaring interbank lending rates.

CreditSights’ weekly funding report said the ECB had effectively become the central clearer for the region’s banks as lenders are increasingly distrustful about funding one another.

Bank deposits with the ECB now stand at their highest level since June 2010 at €905bn (£772bn) as lenders withdraw deposits held with their peers and put them into the central bank. At the same time, banks in major eurozone countries such as France and Italy have become increasingly reliant on central bank funding. This follows the trend seen in smaller countries like Ireland where lenders have effectively becomes taxpayer-funded “zombie” banks.

Alastair Ryan, a banks analyst at UBS, said there would be “no Lehman moment” – or single catastrophic event – for the European banking sytem, but added that without a full backstop of bank liabilities by governments the system would “struggle to finance itself in the next year in a durable way”.

“The system at the moment hasn’t got funding of a duration that allows it to function, so it’s failing,” he said. Others think the eurozone banks are heading for a catastrophe and the worry is growing that a major bank could collapse within weeks.

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