How Close Did Europe Come to Lehman-Style Crisis?

Before the European bailout package landed a week ago, the European banking sector was awash with rumors of an impending liquidity crunch as interbank lending rates spiked, experts told CNBC.com.

Many banks with the highest Tier 1 Capital Ratio in Europe — the ratio between stock plus reserves and total assets and a measure of banking strength — were struggling to raise money for more than a 30-day time horizon on the Friday afternoon before the bailout, Michael Browne, a fund manager at Sofaer Global Research, told CNBC.com.

When the European Central Bank's nearly $1 trillion package was announced on the following Monday, banks were able to raise 12-month funds again, Browne said.

The lack of liquidity "shows just how close we came to a Lehman-like credit event,” he said.

Patrick Allen
CNBC EMEA
Head of News

Investors should now watch the ECB’s balance sheet closely and says all eyes will be on data on Tuesday that will show how much it has grown since the central bank started buying assets following last week’s rescue package, Browne added.

The rescue package was agreed by European Union finance ministers, central bankers and the International Monetary Fund over the weekend of May 8 and 9 and was designed to stabilize the monetary union's financial system.

Kit Jukes, an independent economist who recently left the fixed-income team at RBS, said we are in a brave new world where no bank can now raise money in international markets by offering a few more basis points than the next bank.

On the Friday before the bailout, banks would have been desperate to raise funds given all the uncertainty, Jukes said.

“Before Lehman, UK banks, for example, could raise money from investors in Singapore by offering a little bit more interest,” Jukes said. “Banks are now having to be a lot more clever about how they manage cash inflows.”

“Gone are the days when people would feel safe putting cash in an Icelandic bank offering a 7 percent interest rate,” he said. “People will not unlearn this anytime soon and safety is now far more important to investors. In these difficult times, big banks will pay a bit more to raise cash for fear they may not get the same terms tomorrow.”

Ahead of the package's arrival, the banking sector saw a spike in the cost of Libor (the London Interbank Offered Rate), which is the rate at which banks lend funds to each other in the UK market, Arturo De Frias, research analyst at Evolution Securities, told CNBC.com.

"There were rumors that the interbank market wasn't working very well, but these kind of rumors are impossible to verify," he added.