German and European Banks Essay Example | Topics and Well Written Essays - 1500 words

German and European Banks - Essay Example This survey was conducted by the Centre for the Study of Financial Innovation, Johannesburg, and Pricewaterhouse Coopers. The survey identified liquidity, credit risk and credit spreads as the top three factors that pose a risk to banks. The report highlights the fact that the global financial situation has changed the importance of various risks; liquidity is now the highest risk to threaten banks. The shortage of liquidity has the power to impact the credit and derivative markets and this fear can lead to further worsening of the recessionary situation. Of the three top risks, liquidity and credit spreads had never before been considered as a risk; this is a clear indication of the changing risk scenario. The survey listing also has 'regulatory over-reaction' as the only non-financial risk in its top ten factors. This again is a clear indication that the market fears actions by politicians and regulators who will try to rectify the issue. The survey had varied opinions depending on the class of the respondent. While the bankers saw sharp variations in the credit, derivative and equity market as the most important risks, the non-banking people saw poor risk management and a liberal system of bonuses as the chief risks. The global economic crunch has affected not only the US but also Europe. Not only are the East European banks going to be affected but also the West European banks having loaned out to these banks, will be equally affected. A survey done by credit rating agency Moody's Investors Services states that Hungary and Latvia has already appealed to the IMF for a bailout; Bulgaria, Estonia, Lithuania and Romania may soon be going the same way. Some of the Western European banks were affected; UniCredit of Italy fell 7.3 percent and Societe Generale of France fell by 9.5 percent. The German Banking scenario is dominated by savings banks, cooperative banks and landesbanks, all of which are less-profit oriented than commercial banks. The market is fragmented and there is lot of competition. September 2008, saw two big mergers in the German banking sector. Commerzbank took over Dresdner Bank and Deutsche Bank took over Postbank. This was a direct reaction to other European banks entering German terrain. Banco Santander of Spain, UniCredit of Italy and 'ING of Netherland were the new entrants in the German market. UniCredit purchased Hypo Vereinsbank while Credit Mutuel of France took over Citigroup's German subsidiary. The German banks realised that size matters and the only way they could keep off European banks were through merger. The current economic crisis has led to banks writing down approximately 400 billion dollars in bad loans. Market liquidity and funding liquidity are two factors that interplay to create the funding environment. Market liquidity is said to be low when it becomes difficult to sell an asset that is when it is difficult to raise money by selling an asset. Funding liquidity is said to be high, when money to buy an asset can be easily borrowed. According to Brunnermeier and Pedersen (2008), more funding can be garnered (funding liquidity) if more assets