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A Solution for Europe's Banking Problem

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  • 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.

Suggested Citation

  • Adam S. Posen & Nicolas Veron, 2009. "A Solution for Europe's Banking Problem," Policy Briefs PB09-13, Peterson Institute for International Economics.
  • Handle: RePEc:iie:pbrief:pb09-13
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    References listed on IDEAS

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    1. Reint Gropp & Anil K Kashyap, 2010. "A New Metric for Banking Integration in Europe," NBER Chapters,in: Europe and the Euro, pages 219-246 National Bureau of Economic Research, Inc.
    2. Tapking, Jens & Eisenschmidt, Jens, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank.
    3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
    4. 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.
    5. Jean Pisani-Ferry & Bruno van Pottelsberghe, 2009. "Handle with care! Post-crisis growth in the EU," Policy Briefs 301, Bruegel.
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    Cited by:

    1. Londono, Juan M. & Tian, Mary, 2014. "Bank Interventions and Options-based Systemic Risk: Evidence from the Global and Euro-area Crisis," International Finance Discussion Papers 1117, Board of Governors of the Federal Reserve System (U.S.).
    2. Nicolas Véron, 2012. "Europe's single supervisory mechanism and the long journey towards banking union," Policy Contributions 752, Bruegel.
    3. Saldías, Martín, 2013. "Systemic risk analysis using forward-looking Distance-to-Default series," Journal of Financial Stability, Elsevier, vol. 9(4), pages 498-517.
    4. Handler, Heinz, 2013. "The eurozone: piecemeal approach to an optimum currency area," MPRA Paper 67183, University Library of Munich, Germany.
    5. Edwin M. Truman, 2013. "Asian and European Financial Crises Compared," Working Paper Series WP13-9, Peterson Institute for International Economics.
    6. Nicolas Véron, 2013. "A realistic bridge towards European banking union," Policy Contributions 783, Bruegel.
    7. C. Randall HENNING & Martin KESSLER, 2012. "Fiscal Federalism: US History for Architects of Europe’s Fiscal Union," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 1-31.
    8. Nicolas Veron & Guntram B. Wolff, 2013. "From Supervision to Resolution: Next Steps on the Road to European Banking Union," Policy Briefs PB13-5, Peterson Institute for International Economics.
    9. Adam S. Posen, 2010. "The Central Banker's Case for Doing More," Policy Briefs PB10-24, Peterson Institute for International Economics.
    10. William R. Cline, 2010. "Financial Globalization, Economic Growth, and the Crisis of 2007-09," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 499.

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