Whilst the stability of the Chinese banking system is probably the largest single issue with the potential to disrupt markets presently, the moribund banking system in Europe vies for second place.
Banking Union has three pillars:
- Single Supervisory Mechanism (for systemic banks)
- Single Resolution Mechanism
- Deposit Insurance
To precede all this is a process of establishing solvency with those banks deemed insolvent to either be recapitalized or wound up.
EU credit growth in the banking system is negative/flat. Without an adequately functioning banking system, flow of credit is heavily impaired. Although disintermediated credit is available, it had been mostly restricted to large companies although it seems the latest fad to offer a mid market European credit fund. Nonetheless M3 growth is less than 2% YoY and deflation is an issue.
The exposure of zombie loans and recap is estimated to require recap of $500bn-$1tr. But who knows? But that's an incredible recapitalization relative to the size of the European markets (Stoxx 600 market cap is approx. $12tr).
SSM was supposed to be a clean single regulator, but has now turned out to be a crisis-by-committee arrangement with a recap fund which is too small to prevent anything systemic from taking place, even if bonds are on notice as being less subject to protections in the event of bank failure and the bail out can borrow. The set-up assures moral hazard will run rampant and the doom loop of sovereign credit and bank credit remains mostly intact.
Question: Although banking systems are just one element of the macro-economy, they are critical to their function. Are you in line, above or below the consensus of professional forecasters below and why?
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