Loan crunch looms in Asia as euro-zone banks retreat
Do you think of the euro-zone crisis as a faraway problem that is little connected to booming Asia? If you run a business with ongoing needs for loan capital you might not feel that way.
That is because battered euro-zone banks are being forced to redirect lending to Europe, which means pulling money out of Asia.
The European Banking Authority (EBA) last month increased the amount of capital that European banks need to raise to Euro115 billion (HK$1.14 trillion). The capital is necessary to cover a fall in the value of sovereign bonds held by the banks and improve their ability to survive the debt crisis.
According to the EBA stress tests, Italian, Spanish and Greek banks have the largest capital requirements. With share prices down significantly (40 to 60 per cent in 2011) and weak profits driven by write-offs and lack of balance sheet growth, European banks face difficulties in raising capital.
European banks are important in the global flow of credit. European banking system assets stand at around US$41 trillion, over 250 per cent of the US banking system which has assets of US$16 trillion.
If European banks sell foreign assets and shut (mainly overseas) operations, then the effect on the broader economy will be significant. The European Union's position is that asset sales by European banks are acceptable as long as they 'do not lead to a reduced flow of lending to the EU's real economy'. As a result, continental banks are withdrawing to core markets - Europe -which means cutting lending and downsizing overseas operations in Asia. Some French, German, Spanish and even British banks have been actively implementing this strategy in Asia.
In 2007, European and US banks accounted for 30 per cent and 10 per cent of loans in Asia-Pacific. This has fallen by about half to 15 per cent to 16 per cent for European banks and 5 per cent to 6 per cent for US banks. The level of participation is likely to shrink further. Troubled French banks account for about 11 per cent of loans in Asia-Pacific maturing in 2012. These banks are unlikely to maintain their level of commitment, creating a credit shortfall.
