European banks lose trust in peers

European banks lose trust in peers

European banks lose trust in peers

Workers remove signs from a branch of Greek Cypriot bank Laiki Bank, which was wound up as part of restructuring of the Greek Cypriot banking sector.

Eurozone banks are refusing to lend to peers in other countries in the common currency bloc, signalling a worrying fall in confidence that appears to have worsened since the Greek Cyprus bailout earlier this year, data analysed by Reuters showed.

In a trend that could reignite fears about the euro and its banks, European Central Bank data shows the share of interbank funding that crosses borders within the eurozone dropped by a third, to just 22.5 percent in April from 34.5 percent at the beginning of 2008.

Banks are now lending to other banks across eurozone borders at only about the same rate as when the single currency was first launched, 15 years ago.

The silent retreat to within national borders is most pronounced in the troubled economies of southern Europe but is seen even in Germany.

Cross-border interbank funding of German banks was down by 11.2 percent year on year in March, equivalent to banks elsewhere in Europe withdrawing 29.5 billion euros from its biggest economy.

Eurozone banks’ stock of lending to their Greek peers was a startling 68 percent lower in April than in the same month a year earlier - equivalent to 18 billion euros withdrawn. In Portugal, the decrease was roughly one quarter.

The figures, obtained from the ECB, include lending both between separate banks in different eurozone countries and within a single banking group to its cross-border units.

Faltering confidence may be responsible for the reduction in cross border lending, due in part to a bailout of Cyprus that closed one of its two main banks and imposed losses on creditors, making banks in the euro zone appear more risky.

While the withdrawal of cross-border funds seems to have taken place throughout the year, the figures spiked in several countries - including Germany and Greece - in March, the month of the Greek Cyprus bailout.Lobbyists for the banking industry also say a soon-to-be-finalised EU law making it possible to impose losses, or “haircuts”, on bank creditors could hurt confidence.