The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Comparing current volatility to that in 2008 seems a popular exercise recently -- but there are many notable differences. Let's look at two specific to the much-discussed European banking realm: liquidity and leverage.
European banks have changed their liquidity profiles over the last couple years -- resulting mostly in greatly reduced potential for bank runs. Increased long-term liabilities coupled with reduced reliance on short-term wholesale liabilities help mitigate banks' exposure to the types of funding squeezes prevalent in 2008.
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That doesn't mean the risk is eliminated altogether (which isn't truly possible), but banks have increased the more stable, long-term liabilities from less than 20% of total liabilities (a post-euro low) to more than 23% (a post-euro high). They've also reduced short-term liabilities from about 28% to a post-euro low of around 23%. Those might seem like small percentages, but when you're talking about the banking system of the eurozone, seemingly small percentages mean rather large sums.
Banks are also less reliant on foreign funding sources. Foreign funding is far less stable than domestic, because in a stressed environment, there's often a capital retrenchment -- in other words, capital is brought home in order to take care of potential issues there or to simply avoid potential issues elsewhere. This can leave banks relying on foreign funding sources in a tough spot. A reduction in reliance on foreign funding from a record high of about 16% to a record low of around 12% is another fundamental improvement in European banks' health.
Leverage is another hugely important factor when comparing current conditions to 2008. Banks globally have reduced leverage considerably, as demonstrated by the asset/capital leverage multiple, which indicates leverage has been reduced from 18.5 times to roughly 14.5 times. Leverage can easily compound problems, so banks' exposure to potential trouble is less.
Moreover, not only have banks been reducing leverage, but they've been stockpiling large swaths of cash. In fact, the average four-quarter cash balances of 27 banks in the
MSCI EMU Bank Index
have nearly tripled since 2006!
And remember, European banks are still profitable: They earned 77 billion euros last year and are expected to make another 66 billion euros this year. Accounting for dividend payouts, this equates to about 100 billion euros in organically generated capital.
Investors tend to dwell on the past, and anytime banks run into a bit of trouble moving forward, they'll likely attempt to draw ties to 2008. It's only natural -- the way our brains are wired. But the banking system is much stronger now than it was then: Liquidity structures have changed, leverage has been reduced and cash has been stockpiled -- making the banking system much more resistant to potential shocks.
This article constitutes the views, opinions, analyses and commentary of Fisher Investments as of August 2011 and should not be regarded as personal investment advice. No assurances are made Fisher Investments will continue to hold these views, which may change at any time without notice. In addition, no assurances are made regarding the accuracy of any forecast made herein. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.