The today image of the European banking system following the financial crisis of 2008

The overall picture of the European banking system after eleven years of the financial crisis of 2008 is much better but it creates scepticism. The EU after the financial crisis of 2008 took courageous decisions to rescue Euro-area member states while also setting the roadmap for consolidating the European banking system.

The Single Supervisory Mechanism (SSM), the Single Resolution Board (SRB), is complementary and fully effective in giving new capabilities to the European banking system.

by Thanos S. Chonthrogiannis

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Reasons obstruction the consolidation of the European banking system

The only observed delay concerns the European Deposit Insurance Scheme-(EDIS). The high percentage of non-performing loans (NPLs) in the banking system of Southern euro area member countries such as Greece, Cyprus and Italy do not allow further promotion and progress of the specific policy that concerns this important part of European banking consolidation.

Germany has insisted on its fixed position since 2015 that there should be a quantification of risk in government bonds held in their portfolios by banks indirectly photographing the bonds of the Governments of the countries of Italy, Greece and Cyprus respectively, considering that Governmental bonds should cease to be considered as risk-only investments.

On the other side is Italy, Greece and Cyprus that disagree with Germany’s perspective on this issue because they know that in such a case the systemic banks of these countries would have to increase the own funds rates that they retain based on Basile convention causing the effect of further increasing their systemic banks operating costs.

Without the European deposit guarantee, the system is not fully stabilised and cooperation between European banks is not facilitated. In the current era, eurozone banks are faced with structural profitability problems, which will be steadily deteriorating due to the prevailing policy of negative interest rates applied by the ECB.

For the reader who wants to be informed in depth and in detail how the European deposit guarantee facility can be used for the development trajectory of the euro area economy should read the analysis titled “How  the  Guaranteed  Deposits  in  the  EU  can  help  to  develop  the  Eurozone”.

New challenges facing the eurozone banking system

The new challenges to come faced the European banks are not a few or easy. Such challenges are

1. The Brexit and its handling and given that the City of London will be lost from the EU’s bays-one of the most important financial centers worldwide,

2. The application of the Basel IV rules, which will require a mandatory increase in the percentage of funds that retained by banks in the form of own funds,

3. The limitation of “Shadow banking” with very large funds to operate outside the framework of strict rules applicable to banks.

The conclusion that we are finding is that Europe’s banking system clearly has an improved picture compared to the previous ten years, but remained unresolved significant structural weaknesses, leading it to tackling new future challenges that either these new challenges will become the cause to enlarge these structural weaknesses or lead to new accelerated implementation of past and new policies to successfully tackle all these challenges.

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