Report Merv: Let's Inflate Our Troubles Away in House prices and the economy Posted August 5, 2010 Banking system on verge of new crisis, hedge fund Noster Capital warns The banking system could be on the brink of another crisis, according to one hedge fund manager who has taken a series of short positions against some of Europe's largest financial institutions. By Harry Wilson, Financial Services Correspondent Published: 5:30AM BST 03 Aug 2010 Barclays London-based fund Noster Capital is betting against five major European banks, including Barclays in the UK, Spain's BBVA, and Switzerland's UBS. Pedro Noronha, chief executive of Noster Capital, said he thought many people still failed to understand the extent of the problems facing many banks and were "complacent" about the risks the industry faces. Related Articles * Leverage 'mirage' under fire as banks' profits soar * FTSE 100 rallies thanks to banks and miners * HSBC doubles profits as Asia helps power recovery * City of London still key to UK recovery, new figures show * Forcing lending targets down the throat of banks will kill Britain's recovery * How can we avoid the next financial crisis? "Two months ago everybody was in a panic about the sovereign debt crisis, and now it's like everybody is going on holiday and everything is fine," he said. Talking about the results of last month's stress tests of 91 major European banks, Mr Noronha was scathing, saying the process was flawed. "The point of a stress test is that you stress something until it breaks. These tests included a ridiculous definition of tier-one capital and allowed some banks with... 1.7pc to show levels above 6pc," he said. The other banks being shorted by Noster Capital are Italy's Intesa Sanpaolo and UBI, which Mr Noronha said faced significant dangers over their exposure to Eastern Europe and a stuttering Italian recovery. However, he claims the biggest danger remains the US housing market, where he said there was the potential for a new shock as more Americans default on home loans as mortgages come up for refinancing. Mr Noronha points to a new wave of low-quality "Alt-A" and "Option ARM" mortgages that face refinancing, which he warns could lead to a new fall in US real estate values, which could translate into a further series of losses for financial institutions still exposed to the US property market, which triggered the original crisis in 2007.