Europe’s bank risks back under the spotlight

By:
Jeremy Weltman
Published on:

The failure of Portuguese lender Banco Espírito Santo (BES) points to lingering fault lines in the financial regulatory framework and knock-on effects for banks outside the EU.

Bank stability is slowly returning to many countries affected by the financial crisis, as liquidity and capitalization ratios are beefed-up by new, improved regulations, but Euromoney Country Risk data indicates all 28 EU states still have higher instability risk compared with 2010.

Slovenia, Italy, Hungary, Ireland and Greece have seen their scores for ECR’s bank-stability indicator – one of 15 that risk experts are asked to reassess on a regular basis – fall the most during that time, along with France, Cyprus, Estonia, Denmark, Spain and Belgium.

 

Unsurprisingly, bankrupt Greece is the lowest scoring of all on just 2.9 points out of a maximum 10.

Five other countries rack up less than half the available points, signifying high risk. Ireland (on 3.7 points), Hungary and Spain (4.3 each) and Slovenia (4.7) are joined by Portugal (with 4.9), where the BES fiasco might be just a one-off caused by fraudulent internal practices, but has nevertheless forced a heavy price on an already-burdened sovereign, raising questions about regulatory oversight.

Many European sovereigns lying outside the EU have seen a similar pattern, with the notable exception of rock-solid Norway. Among them are Iceland still trying to resolve the debts that accrued to its failed lenders, Turkey, EU-hopeful Albania and the former Yugoslav republics.

 

Lessons learned from BES

Rising yields and equity volatility, coinciding with the BES shock, illustrate shortcomings of the banking union’s aims to spread the risks, leaving Lisbon to shoulder the bill in spite of a weakened economy and fiscal stress.

The crisis also undermines the credibility of the bank stress-tests that are due to be performed again this October and have previously given a clean bill of health to some lenders later found to be struggling – BES among them.

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, agrees the BES episode shows the ECB’s monitoring mechanism for stress-spotting in the euro-area banking sector "is not working".

With the bank’s problems first becoming evident in mid-2013, the fact it took more than a year to structure a resolution mechanism for the crisis is "showing that the so-called new banking coordination measures at the European level are still a myth", he says.

That would suggest more BES-style mini-crises across the euro-area banking sector could pop up in the months and years to come – a message that seems clear from ECR’s data showing bank-stability risk hadn’t gone away.

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.