European Banks Sitting on €1 Trillion of Bad Debts

European banks are sitting on bad debts of €1tn – the equivalent to the GDP of Spain – which is holding back their profitability and ability to lend to high street customers and businesses.

According to a detailed analysis of 105 banks across 21 countries in the European Union conducted by the European Banking Authority (EBA), the experience of Europe’s banks to troubled customers is worse than that of their counterparts in the US.

The €1tn (£706bn) of so-called non-performing loans amount to almost 6% of the total loans and advances of Europe’s banks and 10% when lending to other financial institutions are excluded. The equivalent figure for the US banking industry is around 3%.

Piers Haben, director of oversight at the EBA, said that while the resilience of the financial sector was improving because more capital was being accumulated in banks, he remained concerned about bad debts. “EU banks will need to continue addressing the level of non-performing loans which remain a drag on profitability,” Haben said.

Banks in Cyprus have half their lending classified as non-performing while in the UK the figure is 2.8%.

Capital ratios – a closely watched measure of financial strength –had reached 12.8% by June 2015, well above the regulatory minimum, as banks held on to profits and also took steps to raise capital – for instance, by tapping shareholders for cash. In 2011, the figure was 9.7%.

The UK’s banks covered by the survey – Barclays, HSBC and the bailed-out Royal Bank of Scotland and Lloyds Banking Group – hold 11.8% of capital, below the EU average.

via The Guardian

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza