Many European banks have used easy credit from the European Central Bank to expand their balance sheets rather than use the easy credit to slim down and cut the level of risk in the assets they hold. In other words, too-big-to-fail is alive and well in the recession-plagued euro zone.
Klaus Masuch from the European Central Bank (ECB) walks toward the Finance Ministry for a meeting in Athens on Tuesday.
Some of Europe's largest banks aren't keeping up with their end of a deal to reduce their too-big-to-fail problems.
Instead of getting smaller, they've gotten comfortable enough with their dependence on the European Central Bank (ECB) to provide them with capital that they've increased their assets by €34.4 trillion ($45 trillion) in the year ended July 31, according to the ECB, instead of abiding by a pledge to trim assets by $1.2 trillion in that period.
The cycle of dependence on a central bank that oversees 17 independent banking systems all sharing the same currency has become one of the biggest issues in resolving the euro zone's banking crisis. Key to stabilizing the euro and holding the monetary union together is getting banks to sell risky assets at depressed prices or even at losses and to lend more money; basically to go back to their roots as smaller and leaner institutions.
But according to analysts, with the ECB there to offer a cushion, some of the biggest banks in Spain, Italy and France -- Banco Santander, S.A. (NYSE:SAN), UniCredit SpA (BIT:UCG) and BNP Paribas SA (EPA:BNP) -- have grown rather than shrunk after the ECB decided in December to offer €489 billion. In February, it loaned another €530 billion.
Instead of deleveraging, the banks are leveraging.
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"The fact that we haven't got on with [deleveraging], or very slowly, suggests that when the time comes, we'll need another ECB injection to roll over the first one, just to keep the balance sheets of Italian banks in business," Simon Maughan, bank analyst for Olivetree Securities Ltd. in London, told Bloomberg News.
With the ECB there to possibly open up its wallet once again, banks have not been too keen to shed assets at a loss.
At the same time, governments in the most troubled euro zone economies, such as in Italy, are hesitant to endure the painful process of letting their own, smaller banks -- the ones that are too big to fail locally but not regionally -- go under.
According to the ECB, the euro zone's financial institutions held €32.2 trillion euros in July, three times the currency zone's gross domestic product in 2011, according to Bloomberg News.
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