ECB: Banks' credit risk at 2008 levels

Frankfurt - Europe’s banks remain exposed to funding and liquidity risks, and the level of risk attached to loan portfolios in some countries is as high as at the time of the collapse of US investment bank Lehman Brothers in 2008, the European Central Bank (ECB) said on Wednesday.

“Notwithstanding the improvement in funding conditions in the first few months of 2011, banks’ funding risks remain among the key vulnerabilities confronting the euro area banking sector,” the ECB said in its Financial Stability Report.

Banks depend on medium- and long-term money markets to offset any funding mismatch that emerges in the time between granting loans and taking deposits.

Sovereign debt fears have caused the cost of accessing unsecured funding to rise and the ECB has propped up the interbank lending market with liquidity through a raft of emergency measures since the banking turmoil of 2008.

“Funding pressures for several medium-sized or smaller banks have manifested themselves in the form of elevated costs of wholesale and/or deposit funding,” the report said.

Aside from sovereign risk concerns, the asset quality contributes to variations in funding costs, “especially in the case of banks located in countries with fiscal vulnerabilities”.

Some banks in a few euro area countries remained reliant on central bank funding, also because the availability and redistribution of interbank liquidity continues to be impaired on account of elevated counterparty risk concerns, the ECB said.

“Although credit risk for the banking sector appears to be less severe than at the time of the publication of the last report, the environment in which banks operate remains difficult and risks are still at elevated levels,” the bank said.

“Important cross-country differences exist and in some countries the measure is currently fluctuating around the levels recorded at the time of the bankruptcy of Lehman Brothers.”

While large and complex banking groups have been able to continue to reduce their vulnerability by issuing debt and equity, issuance patterns varied significantly across countries.

“In particular issuance by medium-sized or smaller banks from countries with fiscal vulnerabilities dropped in comparison with the same period of last year and, in a few countries, there was no issuance in public markets at all," the report said.

A pattern of segmentation among eurozone banks is also evident in regard to liquidity and credit risk.

“Liquidity conditions in euro area funding markets, in particular in the shorter-term segment, have improved slightly,” the report said.

“There are signs of significant market segmentation, with banks in some countries facing difficulties in terms of both the availability and cost of funds.”