The Progressive Zombification Of Europe’s Banks

Ten years after the outbreak of the global financial crisis, banks in the euro area have not recovered.

  • Gunther Schnabl and Thomas Stratmann

The Euro Stoxx Financials is only 40% above its March 2009 low, well below its pre-crisis level (Fig. 1). By contrast, the S&P Financials index in the US has risen by 320%. The different fates of European and US financial institutions could be due to the different monetary and regulatory crisis therapies of the European Central Bank (ECB) and the Fed.

Fig. 1: US and Euro Area Financial Stock Prices


Source: Thompson Reuters Datastream.

The Fed lowered its key interest rate faster than the ECB (Fig. 2) and expanded its balance sheet more quickly via quantitative easing (Fig. 3). The Fed dropped its benchmark rate down to an all-time low of 0.25% in December of 2008. The Fed’s asset purchases included risky securitized mortgage loans, which helped prevent a financial meltdown during the crisis. The US Treasury also purchased more than $400 billion worth of securitized mortgage loans and bank shares under the Troubled Asset Relief Program (2009-2012). Thus, the banks were forcibly recapitalized. As asset and real estate prices recovered thanks to the Fed’s monetary policy, banks’ balance sheets were further stabilized.

In contrast, the ECB was more hesitant to lower key interest rates toward zero. The main refinancing rate only touched the zero bound in 2015 (Fig. 2). Tumbling banks in the southern euro states and Ireland inflated government debt, which finally triggered the European sovereign debt crisis from 2012 onwards. Large-scale outright purchases of assets only set in beginning in March 2015, after the first expansion of the ECB balance sheet via (targeted) long-term financing operations had gradually expired. Out of the ECB’s latest 2,600 billion euro asset purchases 80% were attributed to government bonds (Fed: 47%), which makes the quantitative easing of the ECB look more like a rescue program for ailing governments than for banks. …

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