ECB sees heightened risk of bank failure in euro area

19th December 2011, Comments 0 comments

The risk of failure of two or more major eurozone banks has increased sharply in the past six months and is now higher than it has ever been since 2007, the European Central Bank warned Monday.

The chances of a simultaneous default of two or more banks in the next two years, which were practically zero at the start of 2007, now stand at around one in four, the ECB calculated in a new Financial Stability Review.

"The increase over the past six months of the probability that one or several eurozone banks will default has been more rapid and more marked than in the past, with the indicator of systemic risk reaching levels unprecedented" since the indicator started to be calculated in 2007, the central bank wrote.

The ECB calculates the index by taking into account stock prices and the prices of so-called credit default swaps (CDS), used to insure against the risk of a borrower failing to repay.

Generally speaking, the risks to financial stability in the single currency area "have increased considerably in the second half" of this year, ECB deputy president Vitor Constancio told a news conference.

He saw the biggest risk as a combination of contagion from the debt crisis, the vulnerability of the financial sector and weak economic growth.

Nevertheless, with the ECB making unlimited liquidity available to banks, there was no reason for the banking sector to stop lending to businesses and trigger a credit crunch which would be catastrophic for growth, Constancio said.

At the same time, the risk of a break-up of the eurozone has not been taken into account in the figures because such as a scenario was "unthinkable," he said.

© 2011 AFP

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