If you think the European Central Bank and Bank of England’s stress tests have made Europe’s banking crash proof, think again.
Despite the changes to the banking system, many institutions are still as vulnerable as they were before the 2008 crash, according to research by the University of Portsmouth.
Banks in Italy, France, and Spain were considered the most vulnerable.
Dr Nikos Paltalidis, of the Portsmouth University Business School said that a rerun of the 2008 crisis was “feasible,” with contagion a real concern.
Our findings indicate that despite all the efforts to improve the resilience of banking, some banks are as vulnerable today as they were before the last banking crisis, they are just as likely to fail.
In case of a financial or economic shock, we found that banks would experience losses big enough to reduce their capital below the required regulatory minimum, because the quality of equity on the biggest European lenders is not sufficient to mitigate systemic crisis.
One of the biggest risks, the report concluded, is a shock to sovereign debt markets, as government bonds now make up the biggest proportion of Eurozone banks’ balance sheets since 2006.
The report concluded that more action by governments was needed in order to make the system more watertight.
It is evident from the results that the European banking system remains highly vulnerable and conducive to financial contagion implying that the new capital rules have not substantially reduced systemic risks, and hence, there is a need for additional policies in order to increase the resilience of the sector