E.C.B. Says, Europe’s Banks at Risk From Slower Growth.

European Central Bank said Monday in a report that catalogued in sometimes alarming detail the problems facing the region’s financial institutions. E.C.B. expressed particular concern about banks’ need to refinance some €800 billion, or $980 billion, in long-term debt by the end of 2012. Borrowing costs could rise as the banks compete with governments in the bond market “making it challenging to roll over a sizeable amount of maturing bonds by the end of 2012,” the report said.
“The financial markets remain fragile and especially the developments in recent weeks have shown the necessity of heightened alertness,” Axel Weber, president of the German Bundesbank and a member of the E.C.B.’s governing council, said Monday in a speech in Mainz, Germany.
“It is possible that the short-term impact will not be as severe as seems to be expected at the moment,” said Mr. Papademos, whose term ended Monday.
European banks will need to set aside an estimated €123 billion in 2010 for bad loans, the report said, in addition to the €238 billion they set aside from 2007 to 2009. However, the sum for 2010 was lower than earlier estimates. Banks also benefited from a rebound in securities markets, the report said.
While profitability of larger banks has improved, their shares are likely to fall in the near future, the E.C.B. report said, citing an analysis of options that investors use to bet on the direction of stock prices.“The continued reliance of some smaller or medium-sized euro area banks on central bank refinancing continues to be a cause for concern,” the report said.

“The tensions in the sovereign bond markets spilled over to other market segments, such as the foreign exchange market and equity markets,” the E.C.B. president, Jean-Claude Trichet, said Monday in a speech in Vienna. “Trading volumes and liquidity became erratic, and volatility spiked.”

“In view of these exceptional circumstances prevailing in the financial markets, we decided that exceptional intervention was necessary,” Mr. Trichet said. He said that the E.C.B. could only do so much to restore stability to the financial system. Euro governments must ultimately craft a system for disciplining countries that violate treaty limits on debt and deficits.

“I call on euro area governments in particular to work actively together to reach agreement on a quantum leap of the effectiveness of their collegial surveillance,” Mr. Trichet said.

source by nytimes.com