Cash has turned into rare commodity, and European banks are at a point where few sources are left that could pump cash into their coffers.
“The EBA’s [European Banking Authority] Board of Supervisors has agreed that exceptional measures to restore confidence in the banking sector are urgently needed to enhance the quality and quantity of banks’ capital to withstand shocks and to address systemic risk,” announced the EBA in a Dec. 8 report published on its website.
Dismal results from a bank stress test performed by the EBA in September and released in December indicated that banks might run out of money, spurring the authorities into immediate action.
Europe’s banks have to come up with a total of $149 billion [114.7 Euros] by mid-2012 to improve their capital reserves and present a plan as to the actions they will take to achieve this goal by Jan. 20, 2012.
Greek banks need $39 billion, about 34 percent of the $149 billion, followed by Spain’s banks, requiring $34 billion. Italy’s banks are short $20 billion, Denmark’s banks will need $13 billion, French banks are told to come up with $9.5 billion, and German banks with $17 billion.
Banco Santander S.A. of Spain has to come up with the largest amount, $15 billion. Following Banco Santander, with a much smaller amount of $8 billion, is Unicredit S.p.A. of Italy.
“These measures form part of a broader European package … to address the current situation in the EU by restoring stability and confidence in the markets,” announced the EBA on its website.
Driving European Authorities Into Action
“The Governing Council of the European Central Bank (ECB) has today decided on additional enhanced credit support measures to support bank lending and liquidity in the euro area money market,” declared the ECB in a Dec. 8 press release.
Liquidity, a situation where either cash for immediate or short-term obligations is present or not, has reached a point in the European market that spurred the ECB into action.
The ECB is offering two three-year interest-bearing lending facilities to European banks for which they won’t charge a penalty if they are repaid within one year.
The liquidity improvement plans by the ECB are very aggressive, which, according to banking sector analysts, herald a new era of lending activities and the end of the liquidity squeeze.
The analysts are a little cynical, stating that the ECB is not that interested in the liquidity of the banking sector, but more so in getting banks’ lending activity jump-started.
To improve the liquidity position of European banks further, “the European Central Bank (ECB) has decided to conduct two one-day liquidity-providing fine-tuning operations (FTOs). The first will be allotted on 20 December 2011 and the second on 28 February 2012,” according to an ECB press release on Dec. 16.
Too-Big-To-Fail Paradigm
“When companies fail, they either restructure through bankruptcy or they get sold off. … The problem is that if we save every company who’s [sic] failure would ‘devastate’ our economy, that means most companies would have to be saved. It’s never a good thing when a company fails, and it’s even worse when a big company does. That is the nature of the capitalistic system,” argued a November article on The Provocateur website.
In reality, the economy did not fall apart when large companies were allowed to fail or were reduced from their former size. Woolworths, a major U.K. merchandiser, has been reduced to a mere fraction of its former size. Polaroid filed for bankruptcy in 2005. Bethlehem Steel, which was involved in many infrastructure projects, including railroads and nuclear reactors, filed for bankruptcy in 2001 and never recovered. Pan American World Airways, once considered to be the largest international air carrier, failed in 1991.
Yet, the too-big-to-fail paradigm has not disappeared, despite the U.S. public’s uproar when the federal government bailed out banks and the auto industry, including Fannie Mae, Freddie Mac, American International Group Inc. (AIG), General Motors Co., Bank of America Corp., Goldman Sachs Group Inc., and Wells Fargo Bank N.A.
