Bank runs and bank failures is the new reality in many countries as credit crunch is becoming a challenge within this world economic collapse. Some of the biggest banks in the United States, UK, Europe and all over the world have find themselves in an economic storm that is bigger than the 2008 bank collapse. Right now we are in the middle of an economic collapse that is turning out to be a depression. Because of this the banking industry has also been hit and if this continues, very soon we will have another bank collapse.
In the European Union, regulators had proposed that there should be a drill to simulate and economic crisis and then they would use it to test the capacity of their banks in handling a financial collapse and stock market crash. While regulators planned to carry out their tests this year, a real economic storm hit the entire global economy. The banks are being tested with a real crisis; we have a historic financial impact because of the shutdown of the global economy. All over the world, this economic collapse is visible because factories are shuttered, towns are desolate and airports are empty. This is the biggest economic downturn that the world has ever seen for many years and in the European Union, the economy is expected to shrink by a whopping 4.3 percent.
This economic fallout has strained the banks and everyone is worried that we might have a historic bank collapse. Central bankers and regulators are worried that the strain in the European banks will end up causing a credit crunch despite the measures they have taken to fortify the financial strength of their banks. If this economic fallout persists, many banks will fail and we will have another global banking crisis. Usually, the whole global banking system is interconnected and the collapse of some of the banks will definitely have a domino effect and the entire global banking structure will be affected. Some banks like the Deutsche bank have had many financial troubles for years and this economic meltdown might be the final blow to these banks.
Andria Enria oversees banking regulation at the European Central Bank and in a recent interview he said that so far the damage has been managed but he emphasized that things might get out of control if this crisis continues for months. This bank collapse is coming at a time when the banking system in Europe has not fully recovered from the 2008 global financial crisis. The Deutsche bank is just one example among many banks in Europe that have not been able to clean up their financial mess. Most banks at the moment are plagued with inefficient operations, meager profitability and much inefficiency because of the bad decisions they made in the past. Unlike the United States the European economy depends on the functionality of banks because more than two-thirds of companies in Europe get their credit from banks while in the American economy, only one-third of the companies get their credit from banks. In the US the majority of companies raise funds by selling their shares and corporate bonds. This means that in Europe the banking sector is closely intertwined with companies. If companies perform well the banking sectors also booms and vice versa.
We might see a wave of defaults and this will automatically be a big financial blow to most of the banks. Most of the banks in Europe are overleveraged and this means that they have issued excessive amounts of loans. At the moment we have an economic collapse like no other in history and for sure we will have a lot of defaults. Individuals and companies are well all over the world will not be able to pay back their loans. Even if only 20 percent of the loans are defaulted, this will have a lasting Impact to the banking system in Europe and this might be what will trigger a bank collapse.
Very soon most of the banks might fail; bank runs will be real and this will trigger the biggest banking crisis in history. It will not be a surprise if a few months from now some of the well known banks will no longer be existing. This global economic crisis is acting as the differentiator and at this moment anything fake is being exposed. Our banking system too is being exposed because for many years we have had an artificial system that cannot withstand economic storms. The banking system we know has issued a lot of bad debt and because of this we have a system that is built on sand. The regulators should take note of what is happening at the moment because we need a robust and stable banking system that will serve us even when there is an economic downturn.