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Bank Deleveraging is Weighing on Europe’s Growth

In a region already short on growth, retrenchment by banks will truly be a drag on the economy, as our chart suggests.

The financial crisis left a legacy of excessive debt across the West. Countries need to pare that burden to restore their economies to health. This poses a special challenge for Europe. Banks there not only provide a much larger share of credit to the region’s economy than in the U.S., but, as these graphs illustrate, they also lag well behind their American counterparts in scaling back to a more sustainable position.

European banks continue to operate with relatively thin equity cushions and are under pressure to meet higher capital requirements that will come into force later this year. Some are raising capital. For others deleveraging is bound to be part of the solution. In a region already short on growth, such retrenchment will truly be a drag on the economy.

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