Christian Noyer, governor of France’s central bank said, “The level of capital and the profitability of French banks allow them to absorb all the potential losses on sovereign risks… they don’t need fresh money to honor these commitments”.
What Mr. Noyer might not realize is that capital has little to do with the short term viability of a bank. Perception is everything and short-term liquidity ends up driving the outcome. If the French banks get enough of a short-term capital drain then the French government will be forced to step in front. The fall of any one institution in the European Union will drive higher the risk of default in all financial institutions. The large difference between the United States and that of Europe is that there is no central bank with supreme authority and the fact that european banks are much larger in comparison to their home countries’ GDP’s.
This crisis will not wane until we see a major reduction in perceived credit risk of European banks. Soc Gen, BNP and Credit Agricole are a good place to start: