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A Solution for Europe's Banking Problem

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Author Info

  • Adam S. Posen

    ()
    (Peterson Institute for International Economics)

  • Nicolas Veron

    ()
    (Peterson Institute for International Economics)

Abstract

The European Union's aggressive response to the global financial crisis has prevented financial meltdown, but the continent's banking industry remains very fragile. Experts estimate coming losses in excess of $500 billion, with very little written down so far. These losses plus the problems in Eastern Europe portend widespread cross-border bank insolvencies. Traditional banking (in corporate finance and household savings) remains predominant in the European economies, so healing the banking system is crucial for sustained recovery in Europe. Lingering banking fragility would result in constant disruption or misallocation of bank credit and hinder returns to savers, thus depressing investment and consumption. Ongoing fragility will also harm European trend productivity growth by skipping some investment and R&D cycles, misallocating capital to lower-return projects, and wasting human capital by consigning some workers to long-term unemployment. It will take time and political will to create an EU banking supervisory architecture, but Europe cannot afford to wait. Posen and Véron recommend that Europe engage in system-wide "triage" of major banks on the continent by capital position, leading to public restructuring of the weakest ones. They propose that relevant countries jointly create a temporary supranational agency or Treuhand to implement the triage process, catalyze recapitalizations, and manage any distressed assets that would fall into public ownership. Such a trustee would avoid both harmful races to the bottom within Europe by national supervisors and fiscal transfers between European states for bailouts.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB09-13.

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Date of creation: Jun 2009
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Handle: RePEc:iie:pbrief:pb09-13

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References

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  1. Reint Gropp & Anil Kashyap, 2009. "A New Metric for Banking Integration in Europe," NBER Working Papers 14735, National Bureau of Economic Research, Inc.
  2. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises," IMF Working Papers 08/224, International Monetary Fund.
  3. Hoshi, Takeo & Kashyap, Anil K, 2010. "Will the U.S. bank recapitalization succeed? Eight lessons from Japan," Journal of Financial Economics, Elsevier, vol. 97(3), pages 398-417, September.
  4. Jean Pisani-Ferry & Bruno van Pottelsberghe, 2009. "Handle with care! Post-crisis growth in the EU," Policy Briefs 301, Bruegel.
  5. Eisenschmidt, Jens & Tapking, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
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Cited by:
  1. Martín Saldías, 2012. "Systemic Risk Analysis using Forward-Looking Distance-to-Default Series," Working Papers w201216, Banco de Portugal, Economics and Research Department.
  2. Nicolas Véron & Guntram B. Wolff, 2013. "From supervision to resolution: next steps on the road to European banking union," Policy Contributions 771, Bruegel.
  3. C. Randall Henning & Martin Kessler, 2012. "Fiscal federalism: US history for architects of Europe's fiscal union," Essays and Lectures 669, Bruegel.
  4. Nicolas Veron, 2013. "A Realistic Bridge Towards European Banking Union," Policy Briefs PB13-17, Peterson Institute for International Economics.
  5. Nicolas Véron, 2012. "Europe's Single Supervisory Mechanism and the Long Journey Towards Banking Union," Policy Briefs PB12-24, Peterson Institute for International Economics.
  6. Adam S. Posen, 2010. "The Central Banker's Case for Doing More," Policy Briefs PB10-24, Peterson Institute for International Economics.
  7. Edwin M. Truman, 2013. "Asian and European Financial Crises Compared," Working Paper Series WP13-9, Peterson Institute for International Economics.

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