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Euro area banks have shrunk their balance sheets every month since mid-2009 and the pace has accelerated over the past eight months. This coincides with – or, cynics might suggest, is driven by – the deadline for meeting the 9 per cent core tier 1 capital ratio imposed by the European Banking Authority. The speed of contraction in Italy and Spain is running at two to three times the euro area aggregate.
No one should doubt the scale of what is under way. The IMF recently increased its forecast of overall EU deleveraging, based on a sample of the 58 biggest banks, with the worst case now up from €3 trillion to €3.5 trillion. According to the EC’s recent economic paper (No. 472) on non-bank financial institutions, assets in the Monetary Financial Institution (MFI) sector of the EU27 (excluding central banks) total only €21 trillion...
Maybe it is time for the financial system to go back to traditional basics: pool the risk-seeking part of citizens’ savings and invest directly into securities issued to finance long-term investing. That is easily said. Ensuring that investors are not beguiled with promises of returns from higher-than-understood risks is harder. As society reels from revelations about mis-selling and mis-conduct, it may be hard to separate demons from saviours.
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