World - Europe;Cross-border lending

Lee Hardman Lee Hardman

Potentially, the greatest risk posed to European banks is through losses on cross-border lending, argues Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.

"The explosion in European cross-border bank lending has been broad-based across both developed and developing countries and accounts for approximately 118 per cent and 21 per cent of GDP respectively, according to data from the Bank of International Settlements," he says.

Mr Hardman notes that the euro has come under increasing pressure as financial stability has been threatened in central European economies.

"The European Central Bank recently took the extraordinary action of lending EU5bn to Hungary while the EU agreed to lend Hungary EU6.5bn alongside the IMF and World Bank.

"The steps taken by European authorities clearly reflect the high exposure European banks have to developing Europe."

He adds that the BIS report reveals that European banks' foreign loans to developing Europe totalled $1,600bn at the end of the second quarter - almost 9.4 per cent of GDP.

"The euro clearly stands out alongside the Swedish krona as facing the greatest risk from deteriorating cross-border loans. Swedish banks are particularly exposed to the Baltics, with total loans to the region accounting for 19 per cent of GDP. "In the current environment, we remain bearish on both the euro and krona."