06 February 2012

FT: Europe cannot make bank risk go away

It has long been plain that European banks need more light shone on their exposures and a stronger capital footing. The EBA did its part of the job by recommending that national authorities require bank capital ratios of 9 per cent after discounting sovereign debt holdings. Sadly, the other pieces of the puzzle, in particular a concrete and credible plan for banks unable or unwilling to find the capital by themselves, are limited to rhetoric.

The question screaming for a credible answer is: what will happen to banks that fall short of the required capital-raising? Only a few States can still bail theirs out. Others are promised help from the eurozone rescue fund. If this takes the form of a loan to the responsible State, however, it may simply precipitate a bank-sovereign downward spiral. The alternative is bank debt restructuring, which the eurozone refuses to contemplate.

The EBA provides pan-European oversight, but the fiscal authority and legal ability to sanitise banks remains with States. Their unreadiness to do so leaves the European Central Bank to step in for paralysed funding markets that proper recapitalisation could restart. But this exposes the ECB to hundreds of billions in bank assets. Europe can hide risks in its banking system; it cannot make them go away.

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