24 April 2017

Vox EU: An asset management company for the Eurozone: Time to revive an old idea

The idea of an asset management company for the Eurozone is not new. It is based on the observation that bank fragility across several Eurozone countries, including Ireland, Spain, and Italy, has been at the core of the crisis.

In addition, bank fragility has put sovereigns under pressure as well as held back economic recovery. Even worse, the bailout of failing banks has forced several governments, such as those of Cyprus and Ireland, to seek a bailout by the Troika, made up of the ECB, the European Commission and the IMF. In other cases, most prominently that of Italy, high sovereign indebtedness might have prevented the government from taking more decisive action.

Given the externalities imposed by banking fragility and access to lender-of-last resort facilities inside a currency union, there is a strong case to be made for a Eurozone solution. What is more, the fact that legacy problems associated with the Eurozone Crisis have not been addressed makes the implementation of the new regulatory framework of the banking union more difficult – both technically, as the new institutional arrangements have to address fragility from the start, and politically, as creditor countries are afraid of having to pay for ‘old sins’.

In this column, Thorsten Beck, Professor of Banking and Finance, Cass Business School, takes stock of the different proposals and argues for an ambitious programme rather than for a limited solution. Nine years after the start of the Global Crisis and seven years after the onset of the Eurozone Crisis, the problem is still acute. The high stock of non-performing loans holds can result in ‘zombie’ lending (throwing ‘good’ money after ‘bad’ money) and prevents the adjustments in resource allocation which are necessary for economic recovery.

Furthermore, the high level of NPLs also poses problems for monetary policy transmission within the Eurozone, as lower interest rates do not necessarily result in lower lending rates.

The losses from the Eurozone Crisis and consequent recession have only been partly recognised and addressed and this holds back recovery across the Eurozone.  Accommodating monetary policy by the ECB faces limitations if the monetary transmission channel is clogged because banks’ balance sheets are burdened with non-performing assets. As the Eurozone nears the conclusion of its first ‘lost’ decade, ambitious policy solutions are needed to avoid a second lost decade.  A Eurozone-level approach to non-performing assets and weak banks is an important component of this agenda.

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