European banks fail to cut assets US$1.2tr as pledged

European banks promised last year to cut more than US$1.2 trillion of assets to help them weather the sovereign-debt crisis. Since then they have grown only fatter.

Lenders in the euro zone increased assets by 7 per cent to €34.4 trillion (HK$350 trillion) in the year to July, according to the European Central Bank. BNP Paribas, Banco Santander and UniCredit, the biggest banks in France, Spain and Italy, all expanded their balance sheets in the 12 months to the end of June.

They have Mario Draghi to thank. The ECB president's decision nine months ago to provide more than €1 trillion of three-year loans to banks eased the pressure to sell assets at depressed prices. The infusion, designed to encourage firms to lend, succeeded in averting a short-term credit crunch by reducing their reliance on markets for funding. It also may be making European lenders dependent on more central-bank aid.

"Deleveraging isn't taking place, especially in Spain and Italy," said Simon Maughan, a bank analyst at Olivetree Securities in London. "The fact that we haven't got on with it, or very slowly, suggests that when the time comes we'll need another ECB injection to roll over the first one, just to keep the balance sheets of Italian banks in business."

European banks said last year they would cut assets within two years by more than €950 billion, about 3 per cent of the total. By selling divisions and loans and reining in lending, the firms were seeking to reassure investors they would be able to reduce short-term funding needs and increase capital.

Total assets at financial institutions in 17 euro-zone countries stood at €32.2 trillion in July last year, according to the ECB, more than triple the euro area's gross domestic product last year.