When Lehman Brothers Holdings collapsed, European officials
reacted with barely concealed outrage at their American
counterparts. By letting the investment bank go bust, they
contended, the U.S. threatened to unleash a contagion that
could crash the global economy. "For the equilibrium of the
world financial system, this was a genuine error," Christine
Lagarde, then the French Finance minister, said at the
Today, Europeans have no one to blame but themselves for
their problems. Although the crisis had its origins in the U.S.
banking system, the fallout has been far greater in Europe,
where the region's undercapitalized banks buckled badly and are
still far from healthy. Ireland's banking failures virtually
bankrupted the state; Spain needed a
100 billion ($133 billion) bailout to prop up its
cajas, or savings banks, after an epic property
collapse; two of the U.K.'s Big Four banks remain nationalized;
and even the region's healthier banks are still held hostage by
the euro area's debt crisis. Five years after Lehman it's the
European banking system that poses arguably the greatest risk
to global financial stability. (See also "
Ireland's Banks Take the First Step on Long Road to
Deutsche Bank's Jain (top) and Barclays'
Jenkins are raising capital. (Photographs by
Munshi Ahmed/Bloomberg, top, and Matthew
The threat reflects the sheer scale of the European system.
Unlike the U.S., the region's economies rely much more on bank
lending than on the capital markets to finance activity.
Banking assets stand at a massive "35 trillion, or 3.3 times
the European Union's gross domestic product, according to
European Central Bank data. By contrast, U.S. banking assets
amounted to $14.4 trillion, or 87.2 percent of GDP, at the end
of March, according to the Federal Deposit Insurance Corp.
Although European banks have taken some steps to shrink their
balance sheets and raise capital, those actions fall well short
of what's needed and pale in comparison with the strides
that U.S. banks have made toward rebuilding.
"Too much emphasis has been placed on the hope of the
European economy recovering and not enough on banks' tackling
their individual problems," says Sergio Ermotti, chief
executive officer of UBS, which has taken some of the most
drastic action to downsize, to meet Switzerland's rigorous
Banks in Europe have reduced their balance sheets by a total
2.4 trillion since 2011. They have been slower to
raise capital, although recent moves by Barclays and Deutsche
Bank which raised
£5.8 billion ($9.1 billion) and
2.96 billion, respectively, with share issues
suggest that more banks may begin to move on this