Amid Debt Crisis, Banks Confronted by Familiar Problems

Despite efforts to strengthen the international banking industry, many of the world’s largest financial institutions still face the same pressures that confronted the sector after the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements.

In its annual report, published on Sunday, the association of the world’s central banks said major international banks continued to be weighed down by investor skepticism about future earnings and their continuing reliance on government-backed financing.

The report said that to regain investor confidence, financial institutions should write down underperforming assets and increase cash reserves.

“Banks need to repair their balance sheets,” the organization, based in Basel, Switzerland, said. “This will entail write-downs of bad assets, thus imposing losses on banks’ stakeholders.”

Regulators worldwide have demanded that banks and other financial institutions clean up their balance sheets, but the firms still have a long way to go.

European financial institutions, for example, are currently trying to offload more than 2.5 trillion euros ($3.1 trillion) of noncore loans, or roughly 6 percent of total European banking assets, according to the accounting firm PricewaterhouseCoopers.

The average ratio of loans to deposits for European institutions, an important measure of a firm’s exposure to bad loans, stands at 130 percent, much higher than the average of 75 percent for other banks worldwide, according to statistics from the Bank for International Settlements.

The organization said the Continent’s financial institutions remained too reliant on cheap, short-term loans provided by the European Central Bank, as many institutions, particularly in Southern Europe, struggled to raise new funds from capital markets.

“Many banks depend strongly on central bank funding and are not in a position to promote economic growth,” the organization said.

The dependence by global financial institutions on wholesale funding will probably lead to continued high financing costs for banks for the foreseeable future, as investors demand larger amounts of collateral to protect against potential losses.

In Europe, where exposure to government debt has left financial institutions vulnerable, one-fifth of banks’ assets were set aside last year as a guarantee to obtain new financing, the report said. Institutions in Southern Europe have been hit the hardest. The amount of assets used for collateral by Greek banks, for example, rose tenfold from 2005 to 2011, and stands at around 33 percent of total assets.

As banks reduce exposure to risky assets in economies that are struggling as a result of the global economic slowdown, many firms have pulled back on lending to other financial institutions, particularly in overseas markets. The Bank for International Settlements said borrowing among banks in the euro zone fell drastically from 2008 to 2011, as local firms reduced international lending by 43 percent.

Government “debt holdings are an important drag on banks’ efforts to regain the trust of their peers and the markets at large,” the Bank for International Settlements said. “Exposures to sovereigns on the euro area’s periphery are perceived as carrying particularly high credit risk.”