If you’re still struggling to put together a Halloween costume, RBS strategist Alberto Gallo suggests trying to dress like a zombie bank.
That is in case you live in the eurozone, especially in some of its periphery countries, the hardest hit but the crisis.
Zombie bank costumes “are pretty cheap and come with free ECB liquidity support,” says Gallo in a recent research report. “And until November, you get to trick-or-treat national regulators.”
Last Sunday, the European Central Bank released the results of its asset quality review and stress tests on the main eurozone banks. While it did not come up with big negative surprises, the process has been criticised for missing some factors.
Gallo points to a KPMG study that showed that banks in Europe still have around €100 billion ($125.94 billion) worth of capital set aside to support non-performing loans (NPLs) totalling €1.2 trillion, or about 7.1% of total loans across the eurozone.
Looking at the single currency area, the distribution of the NPLs is uneven, with the periphery the most hit.
Unsurprisingly Cyprus, which went through a deep banking crisis, is the worst hit, with NPLs at 47.7% of total loans. Greece and Italy are next, with 31.3% and 19.5%.
The worst thing for the eurozone periphery countries is that “with the exception of Ireland and Spain, NPLs continue to grow,” Gallo notes.
The ECB has gone to great lengths to ensure that fragmentation – meaning that borrowers in stronger countries get much better conditions than those in weaker ones – is reduced.
But this phenomenon still remains widespread across the eurozone, with the most zombie banks concentrated in the periphery, says Gallo.
These banks lend less, which means companies can’t hire or invest, and this in turn pushes up unemployment. Without restructuring, these banks will continue as zombies.
Gallo suggests some ways to ease their plight without increasing the eurozone’s already bloated government debt:
- Consolidation. There are 6,555 financial institutions, and few of them are profitable. “The number of bank branches in some countries, Italy, for instance, is higher than that of restaurants or pharmacies.”
- Bankruptcy legislation. In Europe, bankruptcy laws are very different. In Italy, foreclosures take more than five years. In Greece, Portugal and France they take around two years, compared with one year in Germany and Spain. This means recovery rates for creditors are very different, and they in turn either ask for more collateral or charge higher loan rates.
- Alternatives to banks. If corporate bond markets are developed further, companies will be able to access funds outside the banking system. The support by the ECB, who will buy asset-backed securities, can “bridge the gap between yield-hungry bond investors and the granular need for funding at the small and medium-size enterprise level.”