“Tougher financial regulation has made European banks more resilient. But the drought of credit now confronting promising businesses across Europe is making the continent’s economy more fragile. These facts are linked – and the second cannot be ignored.

“European banks have strengthened their capital reserves, which have doubled on average since the financial crisis. And they have reduced their exposure to risk, notably by scaling back speculative trading activities. At the same time, their diminished profitability is making it difficult to find the fresh capital they need to meet the tightened rules. Investors can now earn higher returns by investing in industrial companies rather than financial institutions, a reversal of the situation before 2008.

“With fresh investment capital no longer forthcoming, stringent liquidity and capital adequacy ratios can be met only through a reduction in assets, including loans. American banks, too, face harsher rules. But – for now at least – they can offload a large portion of their mortgage loans to government-backed entities such as Fannie Mae and Freddie Mac.”

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Read full Financial Times article here.