For example, the ECB’s Financial Stability Review of June 2007 had warned (i) that the crisis in the US sub-prime mortgage market could deepen and spread to other markets; (ii) that financial market liquidity could vanish abruptly if investor uncertainty and risk aversion were to rise, revealing several vulnerabilities in the financial system; (iii) that investors may be relying excessively on credit rating agencies’ risk assessment of structured products; and (iv) that it had become increasingly uncertain whether those who ultimately held the credit risk could manage it effectively.
The fact is that the European economies, with the partial exception of the UK, are strongly dependent on banks for their financing needs. Too dependent. Let me explain why.