Which are the eurozone's zombie banks?

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It is not an ideal time of year to judge conditions in banking markets, because so much real business closes down over Christmas and new year.

But even allowing for that distortion, what's going on at eurozone banks is troubling.

Here are the relevant statistics.

On 21 December, the European Central Bank provided an unprecedented 489bn euros of three-year loans to the eurozone's banks. That represented a net addition of central bank lending to the banks of 191bn euros (because some banks converted shorter term ECB loans into three-year loans).

Now at that time of year, you wouldn't expect the banks to put all that net 191bn euros of new money to work in a proper sense: it will take time for that money to be used repaying the banks' own debts that fall due for repayment, or providing new loans to customers.

So inevitably a lot of it would end up back at the European Central Bank, on deposit overnight.

Taking a loss

Even so, more money has been put on deposit at the European Central Bank since the auction of three-year loans than the 191bn euros of new money that was made available: on 20 December, banks deposited 251bn euros overnight at the ECB; last night they deposited 453bn euros overnight.

In some ways, this is a totally barmy way for a bank to behave: the banks are borrowing at 1% from the ECB and then lending the money back to the ECB at 0.25%. Or to put it another way, they are taking a substantial loss on their dealings with the central bank.

Why on earth would they do this?

Well, as I've said many times before, it is because they would rather be sure their money is safe and easy to get their mitts on, than take the risk of obtaining a higher interest rate by lending the cash to other banks. It's a sign of how worried they are about the health of banks and the banking system.

Still short of cash

But actually for me there is a more troubling ECB statistic - which is that eurozone banks last night borrowed 15bn euros overnight from the central bank (and a little less on Monday but a bit more at the end of last week).

Why does this matter?

Well the European Central Bank has just pumped an astonishing amount of new loans into the banking system. And yet there are some banks out there which are still short of cash - and are unable to borrow it from other banks, financial institutions or commercial customers.

These shunned banks have to resort to paying 1.75% to the European Central Bank for this emergency overnight money. And given the way they are being forced to live hand to mouth in this way, dependent on central bank support, they can be seen as zombie banks.

The big point, as I've said before, is that a substantial portion of the eurozone banking system has failed, and is on a drip provided by the ECB. But the scale of disease will be better assessed in two or three weeks' time, when the holidays are properly over and seasonal factors can no longer be cited for banks being on life support.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 19.

    So do we have 'pay day loans' scenario writ on a mega scale. What seems to be missing is the information on the true state of banks or at least governments should have this so that they can intervene before we all start queueing at the glass doors. Banking is too important to be left to the market.

  • rate this

    Comment number 18.

    They probably need these billions to pay out in bonuses to their incredibly gifted staff.... It is worrying that Unicredit already needs so much more cash than it could borrow from the ECB on the 21st December. Banks like these should be allowed to fail, with government protecting small depositors of course.

  • rate this

    Comment number 17.

    I find myself contributing to this discussion as a way of understanding what is going on. It appears to be a true crisis of confidence which will eventually result in something rather nasty.
    The whole world seems to have floated along on a bubble of debt for decades. Now it is bringing into question the very value of assets and currencies. Sovereigns can print money, so what is it really worth?

  • rate this

    Comment number 16.

    One bank in trouble might be Italy's Unicredit a 7% fall in its share price today as a rights issue suffered a large discount.
    A bank running out of money? again......

  • rate this

    Comment number 15.

    A set of candidates for the title of zombie banks are those who loaned in Euros and Swiss Francs to Eastern Europe to find this happening.

    "the Hungarian Forint has fallen to 319 versus the Euro this morning which is a new low. And of course the Swiss Franc is linked to the Euro right now"

    The list of bad debts must be growing.


  • rate this

    Comment number 14.

    Which are not zombie banks? That may be an easier list to present!

    Which banks are under threat of reputational damage (if they have any left) in light of current court cases brought by investors in Switzerland and elsewhere?

  • rate this

    Comment number 13.

    And another question (sorry)...

    Even if several EZ banks are circling the drain, debts are too high and sovereign states on the verge of default, what has that to do with the Euro itself?

    If Barclays and Lloyds (for example) both folded and the UK government defaulted, we'd still have the pound (whatever that's worth at that point). What's so different?

  • rate this

    Comment number 12.

    Therefore, in my opinion, emergency measures enacted thus far have been vital to keep the illusion of market-wide solvency intact though wanton disregard for the unintended consequences could well be the straw that breaks the camels’ back

  • rate this

    Comment number 11.

    Why put money anywhere else overnight rather than hold it yourself? And if you must anyway, why is the ECB safer than any other bank?

    What's likely to happen to any bank holding the money in that time? Do they burn down? If so, doesn't the ECB have less banches than the others? Bit of a risk, that.

  • rate this

    Comment number 10.

    Is it not the case that it is essentially them all?!

  • rate this

    Comment number 9.

    To withdraw £40 in London from a major British bank, on a DEBIT card, from a bank in Ireland owned by another British bank, my account was charged 4.5% for currency conversion handling charge. The prospect of the collapse of the euro should alert all persons to the costs of currency conversions, apart entirely from the endless variations in values. The little guy gets it in the neck, always.

  • rate this

    Comment number 8.

    Its all doom and gloom still then?

  • rate this

    Comment number 7.

    Rather than be blamed for causing a run on banks, perhaps ,it would be easier and a shorter list to tell us all which banks, are financially sound enough to NOT require help...

  • rate this

    Comment number 6.

    the lending from the ECB under the Marginal Lending Facility is secured against 'eligible assets' and is provided via National Central Banks, the banks in question probably are struggling for 'eligible' securities for more normal ECB funding operations though there are many 'support' mechanisms firing up at a national level right now to get around this.

  • rate this

    Comment number 5.

    Very interesting. So the banks have still got real problems then. Does that mean we can start to talk about the underlying problem of fractional reserve banking now, and if not why not?

  • rate this

    Comment number 4.

    Robert, is there any reason why the ECB should keep its borrowing rate at a measly 0.25%? Why not up it for a few months to, say, 3-4%. This would inspire some confidence and be a back-door method of QE which the Germans couldn't control..

  • rate this

    Comment number 3.

    You didn't answer the question.

    Which are the eurozone's zombie banks?

  • rate this

    Comment number 2.

    Is this overnight lending by the ECB secured lending? Presumably not. Which means that at least one bank has no good asset to borrow against. And given the dodgy nature of the assets that the ECB has been lending against, we can be pretty clear that either we are going to get cascading defaults, or a huge monetisation of sovereign debt by the ECB.

  • rate this

    Comment number 1.

    Bye bye Euro - we were right all along.


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