European bank balance sheets are shrinking. Barclays Capital analysts note first-quarter declines at 15 of the 25 largest quoted banks in Europe, with banks reporting on average balance sheets 3% smaller at the end of March this year on an annualized basis than at the end of 2010. Remarkably, risk-weighted assets have declined even faster: by 8% on an annualized basis over the same period.
It would be heartening to see this as evidence of banks de-risking and perhaps calculating RWAs on the basis of reduced probability of default against a more stable economic backdrop than prevailed during the recession of 2007-09.
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