The troubled Eurozone has focused attention on sovereign balance sheets with Greece and Cyprus requiring significant bailouts, and Spain, Portugal, Italy and France, all showing considerable strain, but little has been done to repair bank and household balance sheets.
In the USA where non-recourse lending is common, borrowers have been able to walk away from debt by handing over their homes, but in Europe unsatisfied debt continues to dog the borrower’s footsteps into bankruptcy.
In the UK, banks have been making the long haul back to recovery for a number of years, and are finally beginning to emerge from the shadow of their impaired book of bad loans.
But in Europe the day of reckoning had not come, that is till now. It has just appeared on the horizon, courtesy of Mario Draghi, European Central Bank President.
The ECB plans a full review of the Eurozone Banking balance sheet, already exposed by the Basel Capital requirements, leading to a halving of ROE prospects.
“The assessment will commence in November 2013 and will take 12 months to complete. It will be carried out in collaboration with the national competent authorities (NCAs) of the Member States that participate in the single supervisory mechanism, and will be supported by independent third parties at all levels at the ECB and at the national competent authorities.
The exercise has three main goals: transparency – to enhance the quality of information available on the condition of banks; repair – to identify and implement necessary corrective actions, if and where needed; and confidence building – to assure all stakeholders that banks are fundamentally sound and trustworthy.”
Only this week a number of European banks have been fined or asked to carry larger provisions against regulatory sanctions in connection with LIBOR and similar benchmarking infringements.
Add to this the strain of finding new capital in a profit starved world with little prospect of successful private capital raising, and it can quickly be seen why banks have been slow to address impaired balance sheets.
But Mario Draghi knows that if Eurozone Banks are to weaned off central bank support, they must face up to the issues embedded in their balance sheets, just as the US and UK have done.
It will be a testing and nervous 12 months for Eurozone banking as a bright ECB light is shone into the darker corners of their loan books.