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Bank Woes Deepening In Europe

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When the financial crisis struck the global economy last autumn, European governments moved swiftly to keep their biggest banks from falling into an abyss — never mind fears over nationalization.

But now, as big banks on this side of the Atlantic show signs of recovery, a number of their counterparts overseas are sinking into a spiral of deepening losses that has prompted the European Union to consider a more aggressive approach to cleaning up its banking system.

Few people outside Belgium have ever heard of KBC Bank. But the travails of this lender, based in Brussels, highlight the broader challenges Europe is facing by not having more fully confronted the deteriorating health of its financial institutions.

Since October, KBC Bank has had to seek government relief three times. In all, it has received $41.5 billion in financing and guarantees to recover from disastrous mortgage bets that its financial engineers and traders made when times were good. For a bank with a balance sheet of just $425 billion, it is an astounding sum, exceeding the bailout of the Royal Bank of Scotland.

KBC is not alone. Souring loans and festering portfolios of securitized mortgages still plague a number of national banks.

Moody’s, the rating agency that recently issued a warning about the credit risk at 30 Spanish banks, is expected to lower its outlook for the Greek banking sector because of a sharp rise in nonperforming loans. In Ireland, the nationalized Anglo-Irish Bank still has a contaminated loan book that has emerged as threat to the country’s sovereign credit rating.

Nonperforming loans at Russian banks are even more worrisome, composing about 10 percent of the average bank’s books, a figure expected to balloon to 25 percent by the end of the year, forcing banks to raise as much as $80 billion in new capital. And in Sweden, the imploding Latvian economy has hobbled Swedbank, a huge provider of loans in the Baltics.

Scott Bugie, a European bank analyst at Standard & Poor’s, said it would be “a multiyear process†for these and other European banks to improve their capital positions and return to sound financial footing. He predicted that bad loan write-offs at Europe’s 50 largest banks would double next year.

The growing losses have raised calls for several new approaches, including a more aggressive approach by the European Union to diagnose banks’ creditworthiness. Now, regulators are debating whether to impose a regionwide stress test for banks, like the ones the United States required of its 19 largest banks.

But the European proposals have raised questions bordering on incredulity with some critics.

“This has the feel of a Magritte painting,†said Karel Lannoo, chief executive of the Center for European Policy Studies in Brussels, comparing the European Commission’s approach with the surrealism of the Belgian painter. “This is Belgium’s third-largest bank,†he said of KBC, “and it has had three successive rounds of aid, and they still can’t target the problem.â€

KBC does not fit the profile of the classic overreaching bank. Its core business is serving Belgian corporations and individual investors. But as the credit boom approached its zenith, a small team of designers of exotic securitized investments pushed the envelope much further.

Whether it was manufacturing high-yielding collateralized debt obligations, leveraged lending to hedge funds or buying up life insurance policies and securitizing them, these bankers, based in London and New York, cultivated an anything-goes aura that was at odds with the bosses in Brussels.

So eager were KBC salesmen to sell high-reward products like collateralized debt obligations that they effectively promised risk-free returns, which lured a number of nonexpert investors.

A group of European companies that said it was told that the investments were marketed as risk-free is suing the bank.

Luc Philips, the chief financial and risk officer of KBC, said, “the decisions made by KBC FP were preapproved and vetted by the market and credit risk committees at the KBC Group headquarters in Brussels.†As for the lawsuits, Viviane Huybrecht, a spokeswoman, said the bank was examining them on a case-by-case basis.

More fun to come in the Eurozone.

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Guest DissipatedYouthIsValuable

Mucho spass veni, malaka.

Edited by DissipatedYouthIsValuable

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But now, as big banks on this side of the Atlantic show signs of recovery

Also it seems to be a bit of VI ramping, buy US banking shares as they are in a better position.

Although this was expected first the US, then the UK next Europe and then probably back to the US again especially when the ARM resets start to kick in.

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You mean... There is an unexpected item in the banking area... and they need to insert more cash

Well RBS has had asset guarantees running into the hundreds of billions of pounds so that article is a bit of an exaggeration. KBC clearly has some issues though. Incidentally I actually interviewed for a job there a few years back:


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  • 406 Brexit, House prices and Summer 2020

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