By: Dr. Mike Campbell
Over recent months, there has been an exodus of banking funds from Europe to the USA. It has been calculated that some $500 billion has been shifted out of European banks and into US accounts over the past six months. The European arms of banks are naturally concerned that they are exposed to the sovereign debt crisis in Europe, but moving assets will not free them from their obligations in the event of a default. However, converting those assets to Dollars would provide relief if the Euro continues to devalue in the face of the sovereign debt crisis, of course.
Whatever the reason for the transatlantic exodus, it is not helping with problems of liquidity within the European banking sector. The banks seem reluctant to lend amongst themselves and this can choke off the funding that business needs to lead an expansion out of the current economic malaise.
The world’s five largest central banks (the Bank of England, the Federal Reserve, the Bank of Japan, the European Central Bank (ECB) and the Swiss National Bank) have announced that they will act in concert to increase liquidity within the European banking sector. This will be achieved by making Dollar loans available to the commercial banks (the ECB will make Euros available). A further three series of three month loans will be available in October, November and December.
The co-ordinated move by the Central banks has been well received by the markets which closed higher. Banking shares recovered somewhat from their recent battering on the news, but until the cloud of sovereign debt is finally dealt with in a convincing manner, nervousness is bound to haunt the markets.