Some eurozone banks 'just as likely to fail' as they were before 2008 crisis

Almost eight years after the collapse of Lehman Brothers some eurozone banks are just as vulnerable to collapse as they were before crisis hit in 2008, according to research by a UK-based report published on Tuesday.

“Our findings indicate that despite all the efforts to improve the resilience of banking, some banks are as vulnerable today as they were before the last banking crisis, they are just as likely to fail,” said Nikos Paltalidis, of the University of Portsmouth business school.

“In case of a financial or economic shock, we found that banks would experience losses big enough to reduce their capital below the required regulatory minimum, because the quality of equity on the biggest European lenders is not sufficient to mitigate systemic crisis,” he said.

In the immediate aftermath of the collapse of Lehman in September 2008, a number of governments bailed out their banks, including in the UK where Lloyds Banking Group and Royal Bank of Scotland received a £65bn capital injection.

Paltalidis did not scrutinise the UK banking sector but found that a shock in sovereign debt markets across the eurozone would spread fastest around the system to cause losses for the banking industry. He said holdings of government bonds inside eurozone banks were now the biggest proportion of their assets since 2006.

The report, co-authored by Dimitrios Gounopoulos, Renatas Kizys and Yiannis Koutelidakis, concludes: “It is evident from the results that the European banking system remains highly vulnerable and conducive to financial contagion implying that the new capital rules have not substantially reduced systemic risks, and hence, there is a need for additional policies in order to increase the resilience of the sector”.