A new survey has shown that European banks are stalling on unloading loans, instead waiting for them to expire at their own pace. New regulations, which oblige banks to cut their loan portfolios and trading positions so that they can put up more of their own money for every dollar they lend, will not be satisfied for another five years or even more, which is not in line with the expectations of the International Monetary Fund (IMF).
Reuters reported Thursday that the survey from Deloitte indicates substantial cost tied to the delay: it prolongs the shortage of credit for both individuals and businesses, thereby boosting the risk of investment and spending cutbacks that will in their turn impede economic recovery.
The survey of banks representing 11 trillion euros ($14.19 trillion) in assets also found that nearly 75% of respondents said that cutting the amount of debt on their balance sheets will probably take more than five years. That’s longer than the duration of previous banking crises.
The IMF expects them to move a lot faster than that. In its October Global Financial Stability Report, the IMF said that European banks are likely to shed $2.8 trillion in assets—more than 7% of total assets—over two years. Not so, said the Deloitte report, which found instead that deleveraging will be "surprisingly modest" and involve less than 7.5% of total assets over five years.
"While the numbers involved are large in nominal terms, this is a relatively small compared with the expansion of credit in the boom years," said Margaret Doyle in the report. Doyle is head of financial services research at Deloitte.
In addition, less than half of the 18 banks in the survey think asset selloff will be important in cutting down their debt holdings. Almost 60% said their biggest challenge was finding a buyer. They’re not all that eager to deleverage, anyway, if they think it will harm their capital position, and more than 5% of them expect deleveraging to affect their Core Tier 1 ratio negatively.
Although they might have to take large losses on assets to unload them quickly, the Deloitte report pointed out that too slow a divestiture could cause questions about the assets possibly still being overvalued after the credit boom. It said in part, "The uncertainty can slow economic recovery. This adjustment path may feel less painful in the short run, but at the price of a slower economic recovery."