European Banks Prepared for a Crisis?

European Banks Prepared for a Crisis?

The financial impact of the coronavirus surpasses the old worst-case scenarios, threatening a credit crunch or even a new financial crisis.

Some economists expect the European economy to decline by more than 10 percent in the first half of this year because of the pandemic, threatening an explosion of bad loans, deteriorating assets and plummeting share prices.

The question that regulators and central bankers are asking themselves now is whether the measures they took in recent years to crisis-proof the banking system will be enough to prevent a credit crunch, bank failures and a financial meltdown with global ramifications.

Banks are under pressure anywhere on the planet that the virus has spread, which is virtually everywhere. The problem is particularly acute in Europe because many banks there never really recovered from the last financial crisis, which began in 2008 with toxic real estate debt, spread to eurozone government debt and took at least seven years to tame. Lenders like Deutsche Bank in Frankfurt are plagued by meager profitability, inefficient operations and the continuing cost of cleaning up old messes.

More than the United States, the European economy depends on banks to function. European companies get more than two-thirds of their credit in the form of bank loans, while American firms get less than one third directly from banks. They raise the rest by selling corporate bonds or shares.

There is no sign yet of bank failures, in part because the European Central Bank quickly flooded the financial system with cash.