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52 Deleveraging, What Deleveraging
Figure 4.10 Eurozone financial corporations: Assets by type of institution
700
600
500
400
300
EMU - Financial assets / GDP
Financial corporations
Insurance corporations and
pension funds
OFI and financial auxiliaries
200
Other MFI
100
0
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
The central bank
Source: Authors’ calculations based on ECB and OECD data.
If we now look at the leverage of banks as measured by the capital-to-asset ratio
and compare the Eurozone with the US (Figure 4.11), we can see a difference in
both the timing and the size of the adjustment. Since comparing these ratios
for the two economies is made difficult by differences in accounting standards,
we report an index that sets both ratios at 100 in 2008. The chart shows that,
while the US banking sector was recapitalised shortly after the Lehman event,
the Eurozone banks have started this process only recently. The process of bank
recapitalisation in the Eurozone is ongoing in the context of the Asset Quality
Review and the stress tests that will be completed in October 2014. Some further
deleveraging should therefore be expected in the near future.
There are of course reasons for the delayed action on the recapitalisation of
banks in the Eurozone: the large size of individual banks relative to governments
was a significant factor that made recapitalisation via public money difficult,
but governance and structural factors (e.g. cross-shareholding arrangements
typical in many Eurozone countries) were also obstacles to the initiation of a
decisive process (Reichlin, 2014). Had a Eurozone mechanism for the resolution
of banking crises been in place at that time, we would probably have seen more
timely action and a more rapid adjustment of the financial sector. The discussion
of the limits of the Eurozone institutional architecture and the role that these
limits played during the crisis goes beyond the scope of this report. As food for
thought for that discussion, however, it is interesting to observe that lack of
aggressive action towards the banks did not spare the Eurozone from persistent
declines in lending, although it is difficult to distinguish between the causes of
weak lending to the real economy: limited supply of credit caused by undercapitalisation
of the banking sector; increasing risks of credit related to the
protracted weakness of the real economy; or lack of demand, also as a result of
weakness in the real economy.