The European debt crisis is showing new signs that its credit problems are far from over. The European Nations, being one of the largest buyers of US mortgage backed securities manufactured from 2004-2007, is beginning to face the fact that their exposure to sovereign debt could haunt them for years to come. In 2009 US banks imposed “stress tests” on their ability to adequately provide sufficient liquidity during an emergency run on assets and avoid another round of government bank bailouts. European banks are now implementing similar tests.
Highly publicized economic events show stress on the system such as Greece’s public revolts against reforms as the government slashed programs and raised taxes to cover their mounting debts. Germany and Spain are also engaging economic reforms restructuring debt, reducing political banking appointees and branches. The Bank of England, in similar fashion, recently increased their “capital cushions” to protect banks liquidity.
How do European credit woes affect you? Banks are trying to avoid another liquidity crisis by increasing reserve requirements. These reforms have made rates banks lend to each other (over night funds) increase. Tighter banking reforms will drain the system of liquidity. Less liquidity will hinder banks ability to lend freely. Underwriting guidelines will become tighter and loan application scrutiny will increase. If you haven’t applied for a loan in a few years get ready for a new experience. Tighter regulation will not only affect the amount of information you will have to provide, but also lengthen the process, increase costs and ultimately may hinder your loan approval. Over the long term these reforms will provide a more stable global financial structure with significant safety valves, both high and wide, to protect itself from another melt down. Over the short term there will be more pain and less gain.