The pace of European bank deleveraging, or debt reduction, has accelerated in 2013, with banks cutting 1 trillion euros from their balance sheets in the second quarter alone.
The weak European economy has made deleveraging an essential part of the recovery, especially since it was overleveraged banks that got Europe into an economic mess.
“What we are seeing in a slew of European banks is a normal and healthy process as the patient (the EU financial system) attempts to recover from one of the worst financial meltdowns in history,” said Adam Sarhan, of Sarhan Capital.
According to a Morgan Stanley (NYSE:MS) note released Tuesday on European loans, the assets of 250 Western European banks holding as much as 35 trillion euros ($47.25 trillion) in assets fell, as of July 1, by 2.7 trillion euros or 2.8 percent. In the second quarter alone, those assets fell by 1 trillion euros.
According to Sarhan, this is normal practice for recovering banks.
“A natural and normal step for any financial institution, after a major shock to the system, is to deleverage. It is important to keep in mind that the primary cause of the 2008 financial crisis was excessive leverage by many of these same institutions, so simple logic dictates the best remedy would be to deleverage. That process takes time and happens in phases. It is not an easy or quick fix.”