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Reformed Euro Area Banks... Getting Worse Than 2007 Vintage?

For all the ECB and EU talk about the need to increase deposits, share of banks funding and strengthening the banks' balance sheets, the reality is that:

  1. Euro area banks are still more reliant on non-deposits finding than their US counterparts;
  2. This reliance on non-deposits funding in Euro area is actually getting bigger, not smaller compared to the pre-crisis levels; and
  3. This reliance is facilitated by two factors: slower deleveraging in the banking system in the Euro area, and ECB policy on funding the banks, despite the fact that Euro area banks are operating in a demographic environment of older population (with higher share of deposits in their portfolios) than the US system. Note that, Japanese system reflects this demographic difference in the 'correct' direction, implying that older demographic is consistent with lower loans/deposits ratio.

Here's the BIS chart on banking sector loan-to-deposit and non-core liabilities ratios showing loan-deposit ratios:… Read More …