It is normally the banks who put the customers under a microscope conducting various analyses to affirm whether the customer is a credit-worthy client or not. But in Europe it is the other way around as banks are the ones now facing scrutiny before investors or companies lend them any cash. Facing with an investors strike, banks are putting a halt to new loans. Unless the investors strike lifts soon, Europe may be in the brink of a liquidity crunch. At the worst, there may even be bank failures and consequent bailout talks.

The case in point in some respect mirrors the one taking place in government-bond markets. This is to be expected given the links between the banks and governments. During the 2008 crisis, governments strengthened up their banks. Now, governments are leaning on banks to keep buying their bonds. As a result even the strongest of banks from euro-zone nations such as Italy and Spain are finding it hard to borrow from investors. No banks are regarded as safe havens in the way that British and German government bonds provide a refuge for investors. Even strong banks in core euro area countries are being frozen out of the market.

The second vital source of funding is borrowing through short-term interbank markets or tapping into the money markets. Both of these are also drying up. American money-market funds, which were a big source of dollars for the European banking systems, have reduced loans by more than 40% over the past six months. Banks are reluctant to lend to one another except for the shortest possible time, usually overnight.

Banks are responding to the sensitive situation by desperately hoarding the cash they have, selling assets and slowing new lending. The effects are being felt far more widely than in the euro area. In central and eastern Europe, borrowers are hinting at regulatory changes that are encouraging banks in Sweden and Austria to cut their cross-border exposures. In Asia, too, the withdrawal of European banks is likely to drive up borrowing costs and restrict the availability of credit.

Inaction on the part of the monetary authorities around the world could be deemed disastrous. The longer the banks are unable to raise the funding, the greater the chance that one may fail.  It may not be long before the cliché, “Money in the Bank”, would be a thing of the past.

Have a great weekend everyone!