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Alternative Market Briefing

As European banking union sputters, hedge funds see distressed opportunities

Thursday, October 31, 2013

Bailey McCann, Opalesque New York:

The European Banking Authority (EBA) has released its first risk dashboard, assessing the state of play in the bloated European banking sector as finance ministers tussle over the particulars of a proposed banking union. According to a statement from the Authority, the banking sector overall has improved and banks have more capital on hand but many of them still rely on central banks to serve as a backstop.

The overall size of the European banking system represents trillions of dollars in assets relative to its small geographic area and overall economic weakness. The risk dashboard notes that asset quality in the system remains a source of concern even as the eurozone has seen some stabilization. The ratio of impaired loans and past due loans (>90 days) to total loans was found to have increased. Profitability has shown some signs of recovery, but Return on Equity (RoE) remains at low levels.

This structural weakness presents a problem for not only the banks themselves, but the EU as a whole, the size of the banking system is a liability to the governments inside the EU should any major shocks upset this tenuous balance. Moreover, the broader credibility of the ECB is directly linked to its ability to help consolidate and unwind some of the toxicity in the system. "Part of the problem is the market is all over the place about where the problem is, you can find arguments for Italy, Germany, Spain and just as many arguments saying......................

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