The European financial system is again in trouble.
Dexia, the Franco-Belgian bank, has just received a government guarantee. European Union finance ministers are again cobbling together late night rescue plans in an effort to prevent the financial crisis from worsening.
So what is going wrong with Europe's banks? In no particular order, there are seven reasons why European banks continue to struggle:
1. Banks are under capitalized
Bank capital acts as a buffer that can absorb losses. However, bank capital comes with one major drawback; it is expensive. For decades, European banks reduced their costly capital buffers in order to maximize profits.
When the crash happened, many banks ran dangerously low on capital. Since then, European banks have tried to strengthen their capital base. Unfortunately, new risks to bank portfolios have emerged, especially from sovereign debt markets. Despite efforts to increase buffers, European banks remain under capitalized.
2. Weaker banks are holding back the pack
Some European banks are especially short of capital. Banks are intimately connected through the interbank market. A failing in one bank threatens all banks. Therefore the weak banks are causing problems for the strong ones.
3. Investor fear
In an atmosphere of endless stress-enhancing uncertainty, investors are unwilling to invest in banks. At best, this makes capital raising efforts expensive. At worst, for some banks it has become almost impossible to raise new funds. Furthermore, investor demand for bank debt is weak. This has made it difficult for some banks to roll over maturing debt.
4. Asset quality
Far too many European banks provided massive amounts of credit to high risk markets such as real estate. Many European property markets have fallen in a deep slump. Borrowers - that is to say property speculators - are finding it difficult to service debt. Therefore, the asset quality of many banks is, to say the least, dubious.
5. Funding pressures
European banks remain highly dependent on wholesale funding rather than deposits. Moreover, many banks are faced with growing maturity problems. They've been unable to extend maturities and the liabilities side of their balance sheets are becoming increasingly short-term. This growing dependence on short term financing is proving to be quite destabilising.
6. Government debt
European banks are holding unhealthy amounts of southern European debt. Within the Euro area, the probability of sovereign debt default has grown. With each sovereign debt downgrade, European banks have become more vulnerable. The big fear remains an actual default, which would severely test European bank balance sheets.
7. The bankers
With one or two exceptions, European banks are run by the same jokers that drove the European financial system into crisis. The vast majority of these senior bankers made their careers through excessive risk-taking and over leveraging. Unsurprisingly, they are unable to comprehend the fundamental changes wrought by the crisis. They lack the skills needed to downsize balance sheets.
So, four years after the crisis started, and Europe has made little if any progress towards stabilising balance sheets and digging its way back to profitability.
Time for another bank bailout. However, are European taxpayers ready to see obscene amounts of money being pumped into banks, with the usual post-bailout bonus pay outs to failed bankers?