Europe: Problem with the banking system will continue to fester - BBH

Research Team at BBH, suggests that the Italian banks were struggling before the UK referendum and the result drove down interest rates, which keeps margins under pressure. 

Key Quotes

“The prospects of weaker growth as a result of Brexit means that demand for credit will remain soft.  At the same time, the ECB's stress test at the end of the month looms large.

The impact from the Brexit decision, leaving aside when Article 50 will be invoked, has been poor for banks.  The broader ETF of the US financial sector, IYF, is off about 4%.  The more focused US bank ETF, KBE, has lost about 6%.  The ETF that tracks European banks has dropped 22%.

The ECB reports the results of its stress tests toward the end of the month.  Negotiations between the EC and Italy may drag on until then.  New initiatives will be forthcoming.  Up until now the reforms have been piecemeal and diluted through compromises.  Italy's banks are the latest lightning rod.  It is not so much that the attention is unjustified.  Rather it is that there appears to be a problem with the European banking system that will continue to fester, even if Italian banks were on more solid footing.”