As Reek of Desperation Surrounds EU Banks, Regulators Prepare for ‘Derivatives Clearing Crisis’

Zombification of EU banking system gathers momentum.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The past week’s events in Europe were dominated by the pound sterling’s spectacular flash crash to its lowest point in 31 years. As is often the case with flash crashes, we will probably never know what exactly triggered the currency to free-fall by 6% during Asian trading hours, though the most cited cause, apart from a ‘fat finger,’ is the gathering realization that a so-called ‘hard’ Brexit is a very real possibility.
But it’s an eventuality that can be expected to play out in roughly two and a half years’ time, at the earliest, and in light of the powerful forces arrayed against it, it may never occur at all.
In the meantime, something far more dangerous is happening on the other side of the English Channel: the slow-motion meltdown of the Eurozone’s banking system.
In its Global Financial Stability Report, the IMF warned that banks in Europe were too weak to generate sustainable profits even if – and here’s the kicker – the region saw strong economic growth. That hasn’t happened for years.
The IMF also cautioned that the banks’ weak profitability, caused by subdued growth in the Eurozone and ultra low or negative interest rates – something the ECB vehemently denies, preferring to blame the crisis on Europe’s smaller regional or local banks – could further erode their financial buffers and undermine their ability to support economic recovery.

This post was published at Wolf Street on October 9, 2016.