FT: European banks face a dual burden

01 December 2011

Europe's banks will simply have to get used to a higher cost of financing and smaller, more selective, lending capacity. That could hark back to the days before they supersized operations using cheap funding from markets.

For many European lenders, the cost of borrowing from debt markets and interbank markets has risen sharply. Debt markets have been in effect closed to many European banks since July, with few willing or able to borrow at the prices investors are demanding. For some banks, the cost of borrowing has jumped above the rate at which they are able to lend, potentially limiting one source of credit to the wider economy.

At the same time, banks are being pushed to put aside more capital as part of new rules. Meanwhile, policymakers are asking banks to maintain credit to domestic businesses.

The result is a vicious circle, whereby banks’ earnings continue to fall, making it harder to attract investors and once again increasing lenders’ cost of capital.

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