EU banks are predicted to have a rocky future ahead after Mario Draghi, the head of the European Central Bank, warned that some of the regions banks will “face challenges”. These comments followed a violent week in the market, particularly at Societe Generale and Deutsche Bank.

Following these warnings from the European Central Bank, what is the proof that we should expect another financial crisis?

• Similarly to 2010-12, there is a growing interaction between banks and their sovereigns. For example, last week there was a similar pattern where bank share prices coincided with an increase in bond yields in the eurozone’s periphery.
• The market predictions of future inflation has suffered a permanent shift, with the measure falling last week to an all time low at 1.4% telling us that markets no onger believe that it will be possible for the ECB to hit inflation targets of less than 2%
• European banking stocks have lost almost 25% of their value since the beginning of 2016. The are also worries that banks will be hit by low interest rates, low commodity prices and tighter regulations.

Despite this warning for potential challenges, Draghi maintains that we are unlikely to enter another financial crisis due to the larger ‘capital buffers’ then were seen when the market was on the brink of collapse.

 

Safiya Bashir on 16/02/2016