Will European banks go bust

Will European banks go bust : At a Banking conference held today in Frankfurt, and which was sponsored by Handelsblatt, Deutsche Bank's outgoing chief executive, Josef Ackermann, said that some European banks would go bust if they were forced to "mark to market" their portfolios of sovereign debt.

The above at a moment which for Mr.Ackermann recalls the turbulence seen in 2008, after the downfall of Lehman Brothers.

On the positive side of things, the veteran banker highlighted the fact that European banks are now smaller than then and are better capitalized. As well, they are less dependent on short -term financing, hold less 'toxic' assets and manage risk better.

Nonetheless, financial markets are obviously quite nervous, which has been leading to considerable pressures in funding markets, particularly for financial institutions, due to the lack of a resolution of the Eurozone crisis and weaker growth prospects.

For some analysts even, such as those at Royal Bank of Scotland (RBS), banks are approaching a negative "feed-back" loop, through which cash hoarding hurts new lending and revenues, thus aggravating the pressures on their balance sheets.

Despite the above, in a research report published last Friday RBS estimated that European banks have enough collateral to withstand upcoming debt maturities in 2011 and 2012.

These analysts, however, are of the opinion that even if public support strengthens for shared financing (Eurobonds) and bond guarantees (expanded EFSM), European banks will still have to 'de-leverage' and 'readjust' their balance sheets.

In that regard, they point out that over the past ten years European bank balance sheets have grown three times as much as GDP, to the equivalent of over 200% of GDP, versus just 75% in the US. Source londonstockexchange.com

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