Europe Banks Face $587 Billion In Credit Losses

Stress tests of the balance sheets of Europe’s twenty-two largest banks shows that they have credit losses that will reach a total of $587 billion between this year and next.

The analysis was done by the Committee of European Banking Supervisors. Like the banks tests done in the US five months ago, the Europe work assumes slow GDP recovery, a “worst” case.

The information, first publishedin the IHT, raises several extremely troubling questions. The primarly one is whether catastrophic losses at any of these financial firms could test the “too big to fail” principle in Europe again. Several UK banks, particularly RBS, had to be bailed out by the BOE and the public costs of the action went into the tens of billions of dollars. It was not entirely unlike the problems that the Fed and Treasury has to deal with at Wachovia, Washington Mutual, and to a lesser extent Bank of America (BAC) and Citigroup (C).

The data is yet another sign that the global financial and credit system remains remarkably fragile and that rising unemployment, commercial and residential real estate leverage, and large LBO and hedge fund loans are still very much a part of the dangerous and long list of troubles which may face banks well beyond the end of this decade.

Most financial firms have made the case that they well on the path to recovery because the recession is ending. That is a fine case, if the recession is indeed ending which is hardly a sure thing.

Douglas A. McIntyre