European banking sector 'recovering'

31 January 2011

The European financial industry is steadily returning to full fitness following the banking crisis and recession and leading firms are again lending to one another, it has been claimed.

According to a report in the Financial Times, banks are no longer hoarding funding in the way they had been in the wake of the economic downturn, despite the lingering threat of further regulations in some EU countries.

Institutions are understood to have reduced the amount of money held at the European Central Bank (ECB) in excess liquidity, while expectations of a swift exit from post-recession emergency measures have grown in recent months.

"Confidence has improved in the eurozone banking system as things are normalising. This could be a sign that banks are lending to each other again," said ICAP economist Don Smith, adding that the rebound is not yet set in stone.

Last week, ECB executive board member Jurgen Stark claimed in a speech last week that there had been "an improvement in the market situation", sparking further speculation that stimulus measures may be unwound in the near future.

However, other analysts have pointed out that with concerns over sovereign debt still hanging over Ireland, Greece and Portugal, lenders located in those countries remain hamstrung by circumstances and overly reliant on ECB credit.

Although the ECB is no longer providing limitless liquidity on 12-month and six-month bases, last year's worries over national debts forced it to temporarily abandon plans to implement a concrete "exit strategy".

Despite this, excess liquidity dropped to €7 billion ($9.5 billion) last week - after hitting a peak of €350 million last summer - and euro overnight lending rates have surged above the ECB's own base rate.

The New York Times reported last week that Spanish finance minister Elena Salgado had sought to play down fears over the strength of the country's financial sector, insisting the state restructuring fund was sufficient to provide "complete security".

By Claire Archer

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