Will This Be the Next “Subprime Moment” for European Banks?

The word "subprime" is etched in our memory regarding the mortgage market fiasco around 13 years ago.

Now, the word is used in this June 10 Bloomberg headline (subheadline):

Energy Transition May Be Subprime Moment for European Banks

The big risk is investments linked to fossil fuels plummet in value.

Here's an excerpt from the article:

A rapid and chaotic energy transition would leave Europe's biggest banks in financial peril comparable to the subprime crisis that U.S. lenders faced in 2008.

The 11 largest banks in the European Union, including BNP Paribas SA, Deutsche Bank AG and UniCredit SpA, have 532 billion euros ($648 billion) of investments and loans financing everything from extraction to transportation of fossil fuels, equivalent to 95% of their total common equity tier 1 capital (CET1), according to a report from think tank Rousseau Institute, Friends of the Earth France and fellow environmental nonprofit Reclaim Finance. A sudden drop in value of these "fossil-fuel assets" would deplete the banks' capacity to absorb losses and might even leave them vulnerable to bankruptcy, the researchers said.

While oil, gas and coal have fueled economic development since the industrial revolution, the level of carbon dioxide in the atmosphere is at record levels. Scientists have been warning that to avoid the most catastrophic impacts of climate change and reach the Paris Agreement's goal of keeping global warming below 2 degrees Celsius, emissions must be cut in half by the end of this decade and reach net zero by 2050.

For banks, the risk is that assets tied to fossil fuels plummet in value, and possibly become illiquid, as business activities inconsistent with a 2 degrees-or-less world are abandoned. "The devaluation of fossil assets held by banks, following the inevitable ecological transition, could produce significant turbulence or even generate a new financial crisis," according to the report. "The loss in value, whatever the speed, could put banks in a situation of bankruptcy."

The potential for so-called stranded assets "mirrors the subprime mortgage crisis," according to the report.

Some banks are "stronger" than others. Robert Prechter's 2020 edition of Conquer the Crash discusses why it's worth depositors' time to perform research so they can find the strongest bank(s):

In 2008-2009, some U.S. banks came under pressure of insolvency, just as the first edition of Conquer the Crash predicted. Fed bailouts kept most of them open. In the next depression, bank runs and mass closings are far more probable.

The first edition also noted that depositors would become concerned about bank risks and move their money from weak banks to strong banks, making the weak banks weaker and the strong banks stronger. This is just what happened in 2008-2009. A Washington Post article noted that one of the banks listed in the first edition of CTC as safer than most had received a windfall of migratory deposits. When the next wave of banking problems hits, the shift will be even more pronounced.