2 Charts Expose Europe's Ominous Reality


Over the last few days, I've explored the data sets available on the European Central Bank's website. The most interesting insight I've come across concerns the recent lending -- or should I say, non-lending -- behaviors of European banks. As you'll see in the two charts below, the lending trends we're seeing in Europe now closely mirror the trends we observed in the United States following the collapse of Lehman Brothers.

America circa 2008
At the end of 2008, the Federal Reserve announced that it would begin paying interest on both required and excess deposits -- ostensibly increasing its flexibility to address conditions in the then-seizing credit markets. By giving banks like Bank of America (NYS: BAC) and JPMorgan Chase (NYS: JPM) a place to stash excess liquidity without fear of counterparty risk, however, this action incentivized them to stop lending to other banking institutions. And as you can see in the chart below, this is exactly what they did -- choosing to deposit their money at the Fed as opposed to lending it out.


Source: Federal Reserve Bank of St. Louis, FRED Economic Data, "Excess Reserves of Depository Institutions."

Europe circa now
With this in mind, it's somewhat alarming to see a similarly rapid growth of European bank deposits at the ECB. As in the United States, I take this to mean that European banks like Germany's Deutsche Bank (NYS: DB) and Switzerland's Credit Suisse (NYS: CS) believe it's much safer to park their excess liquidity in the continent's central bank than, say, lend it out to Greek shipping company DryShips (NAS: DRYS) or the struggling Bank of Ireland (NYS: IRE) . In this regard, in turn, the ECB's deposit facility can be viewed as the banking industry's economic fear gauge. And as the following chart demonstrates, it certainly appears that everyone over there is getting scared despite the continent's recent Band-Aids.


Source: European Central Bank, Statistical Data Warehouse, Deposit Facility. The December figure is for the first week of the month only.

How should investors respond?
We've spent a lot of time here at The Motley Fool writing about how investors should react to the ongoing crisis in Europe, from hedging your bets to following Warren Buffett's lead by investing in U.K.'s leading supermarket, Tesco.

The best advice I've come across, however, is contained in a recent free report about the company that's set to become the "Costco of Latin America" -- an area of the world that notably isn't buckling under the pressure of sovereign debt. To get your copy of this free report before the market catches on, click here now.

Editor's note: A previous version of this article contained an incorrect home country for Credit Suisse and included an erroneous ticker for Tesco. The Fool regrets the errors.

At the time thisarticle was published Foolish contributor John Maxfield owns shares in Bank of America.The Motley Fool owns shares of JPMorgan Chase and Bank of America. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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