Why are the banks in crisis again?

FT.com / Columnists / Tony Jackson - Why are the banks in crisis again?: "Karen Olney, European strategist with Merrill Lynch, sees the threat differently. Investors, she says, already assume government is the only answer. Their worry is that, as lending risk increasingly becomes sovereign risk, the burden will act as a brake on the whole economy.

The scale of that threat is indicated by a chilling little exercise from Merrill’s bank analysts. This involved measuring European bank assets as a proportion of Europe’s gross domestic product over the years.

The analysts then made the arbitrary but not unreasonable assumption that the ratio should revert to the pre-credit bubble levels of 2002-03. That would apparently mean European banks shrinking their assets – in effect, their loans – by €5,500bn. The reduction so far has been €800bn, leaving €4,700bn to go.

If nothing else, this seems further proof that banking will emerge at the other end of all this changed beyond recognition. I have floated before now the notion that the industry might have been caught up in a 25-year supercycle. That now looks less fanciful by the day."