Authors Dirk Schoenmaker and Toon Peek write that the Baltics, Cyprus, Greece and Ireland have been hit by a strong decline in lending in the wake of the financial crisis.
This deleveraging is mainly caused by a reduction in cross-border supply of credit. The authors also examine the capital position of the European banking system, using November 2013 stock market data. In the basic scenario, to restore capital to a market-based leverage ratio of 3%, €84 billion of extra capital would be needed for the largest 60 banks.
At the bank level, the top tertile of well-capitalised banks (with a market-based leverage ratio well above 4%) continues lending. By contrast, the 2nd tertile of medium-capitalised banks (between 3 and 4%) and the 3rd tertile of weakly-capitalised banks (well below 3%) show a strong decline in lending. Moreover, the market-to-book ratio is below one for those banks. The market thus gives a lower value to these banks.
The authors' finding provide prima facie evidence of a credit crunch in Europe. Another fallout of the financial crisis is an increase, though very modest, of concentration in banking in the distressed countries (Greece, Ireland, Portugal, Spain and Italy). The enhancement of financial stability through (forced) M&As seems to come at the expense of reduced competition.
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