While the first days of the 2008 financial crisis are long gone, the large level of bad loans continues to be a drag on the European banking system and could spark new crises in the coming year, an analyst told CNBC.
Investors are currently focusing on the recapitalization process at the oldest lender in the world, the Italian Monte dei Paschi, which is set to become a template for how the rest of the Italian banking system can be overhauled. But, given that Italy is not the only EU country with high bad loans in banks' balance sheets, analysts are worried that further banking crisis will emerge in Europe.
"In the States, the economy hit the wall, people wrote off all the bad loans, they got on with it and the banks recapitalized and move forward," Howard Goldring, managing director at Delmore Asset Management told CNBC on Monday.
"This process in Europe is taking years because of refusal to face reality and I am just worried that there's going to be more of this over the next year or two, not just in Italy but in other places across Europe."
According to KPMG, the European banking sector has about 1.1 trillion euros ($1.2 trillion) in non-performing loans, almost three times as much compared to the U.S.
At the moment, all eyes are on Italy, which was recently forced to opt for a state intervention to Monte dei Paschi. The process is still ongoing, but it has renewed concerns that taxpayers' money will be always at the front of the cue to rescue ailing banks.
"It's very difficult to solve a banking crisis just out of private capital… so finally we have a template for a solution, which is also funded by the taxpayer, which is probably not the best thing to do but sometimes it is the only thing you realistically can do," Francesco Castelli, fixed income portfolio manager at Banor Capital told CNBC on Monday.
Initially, Monte dei Paschi was supposed to gather 5 billion euros ($5.24 billion) from private investors, but the bank's situation deteriorated due to a political crisis and investors were reluctant in stepping in. The Italian government has then been forced to intervene and protect the third largest lender.
"There will be a bit of money lost from subordinated bondholders, which will be converted into equity, but it's probably a fair price in order to get the thing moving," Castelli added.
The European Central Bank said that the weak situation of BMPS demands a capital injection of 8.8 billion euros ($9.22 billion). The Italian government needs to ensure that such capital intervention is compliant with EU state aid rules.
One possible way to guarantee compliance with EU rules is to compensate retail investors for their losses.
In total, the Italian government has planned to support the country's banking system with 20 billion euros. Thus, the intervention to Monte Dei Paschi, which should start in two to three months, could set a precedent for the other banks.
"This is going to be a template for the solution of the crisis and this is going to be a very interesting opportunity to shore up the finances of all the troubled banks in Italy," Costelli added.