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Tuesday, June 29, 2010

Banks on Life Support

The Bank for International Settlements (BIS) has warned that European banks are still "on life support", and that they need to "come clean" about their bad loans.

The Telegraph quotes the BIS annual report:

"Losses on European bank balance sheets are expected to mount over the next few years. Some banks are rolling over existing loans rather than inducing foreclosures, thus delaying loss recognition."

Rather bizarrely BIS then state that low interest rates and fiscal stimuli by governments is exacerbating matters, causing "moral hazard".

I would venture to suggest that were the rates and stimuli packages reversed, the slump caused would be far more detrimental to the economic health of Europe than the "moral hazard" issue.

I would also note that the low rates and fiscal stimuli do not in themselves cause banks to behave "immorally". Banks behave either "morally" or "immorally", depending on their culture and internal controls; to blame others for the failings of banks is shortsighted.

BIS do, correctly point out that Europe and the US are unlikely to be able afford to bail out the banks again, and that a Greek sovereign debt crisis is more than likely.

In view of this, to suggest that fiscal and monetary conditions should be tightened at the very time that the US and Europe are struggling to drag themselves out of recession is foolhardy in the extreme.

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