Efforts to fix banks’ debt woes suffer bad breaks
by Satyajit Das
Banks worldwide are highly leveraged, leaving them vulnerable to even a small loss, which can wipe out a significant amount of capital and increase the risk of insolvency. Now a new global banking crisis may be beginning; the pieces are falling into place.
Exacerbating the danger is that in many advanced economies, banking systems are large relative to the real economy. They are vital in facilitating payments and supplying the essential credit that drives consumption, investment and government spending. Any disruption quickly results in a slowdown in the economic activity.
Today, several areas of banking stress are clear. Consider European banks, which hold around 1.2 trillion euro worth of problem loans.