The way to solve the euro zone banking crisis for the long-term is for a third of the industry to disappear, according to Ralph Silva, the research director at financial management consultant SRN.
“The only solution to the banking issue at this point is dealing with the oversupply of banking products. Europe needs to see a third of the banks disappear so the other can prosper,” said Silva in an interview with CNBC on Friday.
Silva believes the European banking sector is showing strains on all fronts.
“Investment banking is near a standstill, trading volumes are slow, corporate demand has slowed to a trickle, small and medium sized businesses are too risky and retail is avoiding debt,” he said.
“While the banks are managing defaults much better and most are correctly focusing on efficiency, overall, we have more problems on the way,” said Silva.
Despite having more funds to buffer themselves against any trouble, Silva believes a major escalation of the sovereign debt crisis in Europe would see this cash disappear very quickly.
“We only have a dozen banks in Europe that you can truly consider 'safe,' the rest will survive or die based on their ability to raise funds quickly, simply because the aptitude for investing in banks is limited,” he explained.
Given the inability of European nations to get ahead of the crisis, Silva told CNBC that the only mechanism for fixing the problem is the ECB.
“Speed is critical on averting Spanish and Italian sovereign crisis,” said Silva.
“We are approaching a 'trouble triangle,' Spain and or Italy needing more money, citizens in fear and refusing to spend, and a banking industry refusing to lend. If all this happens in the next three months, we will see a deep economic contraction,” said Silva, who believes investors need to diversify their money geographically.
“We've never seen this type of sovereign problem so we can't be certain what regions are going to be most affected,” he added.