Early in the financial crisis, the US forced all large banks to take an infusion of capital. This helped put a floor under the US financial system. Regulators and stakeholders encouraged US banks to address the significant nonperforming loan problem.
The eurozone banking woes persist. Before the weekend, the shares of the one the largest banks was trading at 25-year lows. The problem with nonperforming loans though is largely concentrated in the periphery. Italy is moving to finalize its latest attempt to deal with its NPLs, which are estimated at around 360 bln euros. The banks have made provisions for about 40%-45%, according to reports.
European bank shares have been battered this year. Italian bank shares have been among the hardest hit, though in anticipation of the establishment of a bad bank and a private fund to provide equity funding, banks shares rallied before the weekend and today.
The Great Graphic here is from Bruegel. It shows the nonperforming loans as a percentage of total loans for the US (yellow), the eurozone (red) and the UK (blue).
The US and the UK are less dependent on bank lending than the eurozone. Businesses in the US and UK rely more on the capital markets for funding, while the eurozone is more bank-centric. It is difficult to envisage a sustainable recovery in EMU without a healthier banking system.
The old issue remains. There is a debate about US banks being too big to fail. Yellen argued last week that rather than break up the banks, as presidential candidate Sanders, and the new President of the Minneapolis Federal Reserve have advocated, the Federal Reserve will regulate them closer and require much greater capital buffers. In Europe, the challenge is that some banks have assets and/or derivative exposures that are a multiple of their country's GDP. That makes the banks not only too big to fail but too big for a country to save.