'Comically low capitalisation' of banks driving risk aversion

BONDS

Credit markets have deteriorated in 2010. The current bout of risk aversion stems from the comically low capitalisation of European banks.

Several large European banks sport a ratio of equity to assets below 3% – an insufficient cushion. That number does not inspire confidence among creditors. As a consequence, we believe the inter-bank market for short-term deposits has almost dried up. It is no exaggeration to say large parts of the financial system remain ‘on life support’, with the ECB providing some €879bn of gross loans to eurozone banks. Forget all the mumbo jumbo about stress tests, Basle-3, tier-1 hybrid securities and risk weighting – we need much more equity in the banks’ balance sheets. Only then will folk ha...