Nearly eight years after the peak of the financial crisis and the collapse of US investment bank Lehman Brothers, Europe’s banking system remains on life support, reliant on cheap money being thrown into the system by central banks. They’re struggling to grow profits and build capital buffers themselves, partly because of the low interest rates that those central banks brought in to try and stimulate growth and inflation in the wake of the financial crisis. Many banks are also still being hit by huge fines and charges for bad practices in the run-up to the crisis, and are relying on cost-cutting to preserve profits.
After recent EU stress tests of the banks, officials insisted that the banking system is slowly returning to health, but it hasn’t stopped investors fleeing the sector, spooked by developments in Italy and Germany. There’s also been criticism of the EU tests for not being as tough as US tests.
Italy’s banks are in particular crisis, with Italian Prime Minister Matteo Renzi having to arrange a €5 billion private sector rescue of third-largest lender Monte dei Paschi di Siena, the third recapitalisation of the bank in as many years. The deal with a pool of investment banks will see nearly €28 billion of non-performing loans moved into a special vehicle that will be securitised for sale in an effort to give the bank a fresh start. Renzi is busy hailing the deal, but investors are showing scepticism.