Anyone watching recent developments in European banking supervision could easily become cynical.
On the one hand, Germany’s HSH Nordbank, which was hit badly by the 2008 financial crisis, is being pressed by the European Central Bank to process its collection of non-performing loans more quickly.
On the other, the financial institutions groaning under an even larger mountain of bad debt in Greece are described as “solvent and liquid,” even when they have closed, and therefore require no action.
Schizophrenia? It’s just a bow to the absurd reality of an ill-constructed euro zone. Yet the politically motivated use of double standards for measurement shouldn’t blind us to one fact: In addressing bad loans of European banks, the ECB has taken on a critically important task for the continent.
Experience from earlier financial crises proves the quick sell off of bad debts is key to the recuperation of banking.
It may be that HSH, with its multitude of questionable ship loans, is an isolated problem in Germany, but across Europe, it is just the tip of the iceberg. According to estimates by PricewaterhouseCoopers, Europe’s banks are now dealing with €1.9 trillion ($2.07 trillion) in undesired financial assets, including €1.2 trillion in bad loans.
They are lethargic in processing the results of their earlier lending. At the current pace, the banks would need another 20 years to sell off or liquidate those debts.
This is why the ECB has made accelerating the processing of non-performing loans a priority. Thus, HSH will not be the only bank under pressure and that’s both good and important. Experience from earlier financial crises proves the quick sell off of bad debts is key to the recuperation of a banking system.
The staggering number of past-due loans in countries including Italy, Spain and even Germany must be reduced immediately and the resulting losses must be made transparent. Until then, the banks’ Achilles heel remains and hampers them in the granting of new loans. Only when it is resolved will investor mistrust of banks in the wake of the financial crisis diminish.
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