Do we have to expect a second banking crisis?

The financial institutions in Europe are currently recovering slowly from the economic crisis when several experts stir up the next horror scenario. According to the valuation of the economists, the consequences arising out of the company insolvencies will hit the financial sector in a second round, this time especially the savings and loans, at full tilt.

The small and medium sized businesses (e.g. in Germany) have received their loans mainly from saving and loan institutions. Due to the significant decline in turnover and export, those companies are struggling and often have to file for bankruptcy. Insolvencies and credit defaults of their clients will cause a lot of financial institutions to sway.

However, the institutions will most likely weather the storm better than the last crisis, according to the chief economist of Allianz, Michael Heise, and I agree with him. The banks have reacted to the crisis and invested heavily into risk provisioning. In addition, the governments “rescue parachute” is already in place to help the financial institutions in need.

Nevertheless the savings and loans who managed to remain stable through the first wave (due to their lack of risk appetite and their concentration on retail banking) have – like the other financial institutions – to ensure that their equity ratio is high enough and that they fully understand the risk involved and the probability of default of their loans. The right level of detail for this kind of analysis and appropriate reporting is therefore a must.