Friday, August 12, 2011

Weaker euro states could lose local banks

Weaker eurozone members face the prospect of being left with no domestic banks in future as market resistance to funding lenders in peripheral countries grows.

Equity analysts at Standard & Poor's, the credit rating agency, said that the problem with the European banking system is that it is "not aligned to the single currency area" and that larger banks with operations across the region were likely to replace smaller single country-focused lenders.

"We envisage that banks operating on a more EU-wide basis, alongside an ECB with appropriate powers, would be an important part of a sustainable euro project," said Tony Silverman, a financial analyst at S&P.

"This may mean peripheral countries should not necessarily expect to have their own domestic banks," he added.

Mr Silverman points out that about 50pc of eurozone deposits lent through the European Central Bank and the interbank market are to banks that have loans in excess of their deposits, adding there is a "conspicuous" absence of banks that are net lenders to the market.

"We would question whether this is sustainable and indeed to what extent such funding can meaningfully be regarded as temporary," said Mr Silverman. (more)