European inter-bank lending is under strain, threatening to hamper the availability of credit that is the lifeblood of the financial system and keeping European central banks on high alert.
“We have a money market which is not functioning perfectly, that is absolutely clear,” European Central Bank (ECB) President Jean-Claude Trichet said last week.
Reluctance to lend is especially apparent in the operations of medium-sized banks, notably in Spain, say industry sources — and some of the anxiety reflects uncertainty about the soundness of banking finances, they say.
Trichet said recently that the results of “stress tests” carried out on the accounts of major European banks would soon be communicated to European finance ministers.
The tests are designed to determine a bank’s capacity to weather periods of extreme economic or financial hardship.
“There are likely to be banks in the European system, in Spain for example, that are in a situation of not being able to pass these tests,” said Pierre Flabbee, an analyst with Kepler Capital Markets.
While several governors of national central banks in Europe back the publication of the results of such tests, there is also fierce opposition.
“The problem is that you release this information you are condemning them [banks] if you don’t have an immediate support mechanism” to propose, Flabbee said.
Medium-sized Spanish banks are trying to cope with the pressure by consolidation ahead of a June 30 deadline to tap a government rescue fund.
Another reason banks are reluctant to lend among themselves is the knowledge that banks have substantial holdings in bonds issued by financially troubled eurozone governments in Greece, Italy, Portugal and Spain.
But on Friday rating agency Moody’s sought to calm the waters, insisting that European banks were strong enough to withstand any sharp losses on their holdings of European government debt.
Moody’s said it had done its own “stress tests” on banks, which showed they would be able to cope without having to raise extra funds from shareholders.
The ECB said last Thursday it would maintain a key support facility for eurozone banks, which would allow them to borrow amounts of cash in regular three-month refinancing operations through September.
The ultimate goal is to ensure plentiful liquidity in interbank lending markets.
“The banks are asking themselves: ‘My God, how can we live without the ECB,’” said one banking source, who asked not to be named.
But no one at the moment is suggesting that the situation is approaching the ominous credit crunch that emerged after the collapse of the US bank Lehman Brothers in September 2008 and which threatened the banking sector as a whole.
“The situation is not that severe,” Flabbee said.
Also See: Europe arrives at a crossroads
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