Weaker euro states could lose local banks

Equity analysts at Standard & Poor's, the credit rating agency, said that the problem with the European banking system is that it is "not aligned to the single currency area" and that larger banks with operations across the region were likely to replace smaller single country-focused lenders.

"We envisage that banks operating on a more EU-wide basis, alongside an ECB with appropriate powers, would be an important part of a sustainable euro project," said Tony Silverman, a financial analyst at S&P.

"This may mean peripheral countries should not necessarily expect to have their own domestic banks," he added.

Mr Silverman points out that about 50pc of eurozone deposits lent through the European Central Bank and the interbank market are to banks that have loans in excess of their deposits, adding there is a "conspicuous" absence of banks that are net lenders to the market.

"We would question whether this is sustainable and indeed to what extent such funding can meaningfully be regarded as temporary," said Mr Silverman.

Banks in countries such as Greece, Portugal and Ireland have become dependent on ECB funds to remain in business and loans originally seen as short-term have become an integral part of their funding.

The eurozone crisis has put a focus on these issues and there are now doubts as to whether many of these lenders remain viable as independent entities in the longer term.

"Eurozone countries have as much right to their own banks as Northumberland," said Mr Silverman.

Ireland is undertaking a drastic reform of its banks and is in the process of merging four of its largest lenders to create two new – what is hoped will be more solid – banks able to eventually be returned to the private sector having been nationalised. In Spain too, the authorities have pushed the country's regional savings banks – known as cajas – to merge to create larger banks.

However, Mr Silverman's analysis suggests that even these larger institutions will remain unsustainable in the long-term due to their domestic focus.

Figures for May show that ECB borrowing by Spanish banks increased for the first time in nine months, pointing to an increased funding risk among the smaller savings banks.

In France there are also concerns that the funding markets are becoming increasingly wary about the country's banks.


The telegraph

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