Although the new European financial framework makes banks more resilient in the face of short term shocks, the ‘too big to fail debate’ could be a problem within the EU, due to the fact that big institutions are now more of a cross-border threat than they are to anyone country, as was the case in the past.
“Poor profitability is going to persist due to weak credit demand and the low interest rate scenario”, explained a financial expert from one of the three big credit rating agencies. Therefore, we cannot exclude “further structural reforms in the UK, France, Germany and even at EU level”, according to his outlook.
This expert, who prefers to speak under anonymity, explains that banks now “have enough capital and fewer liabilities to be engaged in bail-in without suffering a huge impact in their operating profits”. Financial institutions have been going through deep changes about how they do business, while working in an economic climate which appears to be in decline. A senior analyst from one US investment bank put it another way.
“Banking Union lays the foundation for more complete financial integration and also a strong supervision from EU authorities”, says this European financial researcher, and “it is necessary to encourage further cross-border integration”.
These movements could happen after the stress tests showed a capital shortfall of almost €10 billion within the European financial sector and questioned the health of Italian and Greek financial sectors. But the rating agency has a wider range for possible financial restructuring.
“We think that France is a more friendly bail-out country” in the actual framework, whereas “in Spain or Italy sovereign support has declined”, the credit rating agency expert concluded.