Blog Post

European banking needs a state-led triage body

Adam Posen and Nicolas Veron briefly outline the proposal of their policy brief ‘A Solution for Europe’s Banking problem‘, that a number of European states should jointly create a trustee to manage the triage, restructuring and resolution processes, which they believe indispensible to heal the European banking system. The Bank for International Settlements has just […]

By: and Date: July 1, 2009 Topic: European Macroeconomics & Governance

Adam Posen and Nicolas Veron briefly outline the proposal of their policy brief ‘A Solution for Europe’s Banking problem‘, that a number of European states should jointly create a trustee to manage the triage, restructuring and resolution processes, which they believe indispensible to heal the European banking system.

The Bank for International Settlements has just announced that national governments have done too little to clean up their banking problems, and it is right. The European Summit concluded that there can be no fiscal federalism to transfer funds between banking systems, were they to require recapitalisation. That is reality. It seems difficult to craft a policy responding to the first while abiding by the second. Yet, all recent systemic banking crises in developed countries (including the US savings and loans, Sweden and Japan in the 1990s) have only been solved when there was a government-led triage process, with state intervention to resolve the cases of insolvency.
Carrying out the needed Europe-wide bank restructuring without fiscal transfers between members is difficult, but not impossible. In A Solution for Europe’s Banking Problem, we propose the creation of a “European Bank Treuhand”, a fiduciary entity or trustee that would be created jointly by those countries where the main continental European banks are headquartered (the UK is a separate case, as most of its banks have only limited operations on the Continent). The Treuhand would have three tasks.
First, it would apply triage to all large or heavily cross-border banks, assess their balance sheets on a truly comparable basis (including stress-testing), publish what it found regarding specific banks simultaneously and thus signal where capital is required and how much. A triage done by national authorities, even on the basis of commonly agreed methodologies, would remain ineffective given the enormous incentives to protect national bank champions, triggering a supervisory race to the bottom. That is the main reason for the non-response of European bank supervisors to date.
Second, it would serve as the catalyst for the intergovernmental negotiations to recapitalise and restructure those financial institutions that are insolvent. Cases such as Fortis in late 2008 have shown that ad hoc burden-sharing agreements are possible, but that they can unravel quickly when there is no trusted player to steer the process, which is what the Treuhand would do. In fact, because it would be dealing with all large or significantly crossborder institutions in continental Europe and releasing the results simultaneously – about 40 in number – there would be a strong incentive for national governments to pick up their share of the burden where they have minority interests, lest they be punished by markets and governments on their majority-owned cases.
None of the existing European Union-level institutions has the mandate and skills needed to achieve such a task, including the soon-to-be-created European Banking Authority, which will take years before acquiring the necessary heft. Importantly, like the US Resolution Trust Corporation or bodies in Sweden and Japan, this would be a temporary institution, to exist long enough to resolve the crisis.
Third, the Treuhand would manage those assets and institutions thus brought into public ownership on behalf of the owning national governments. This would provide the necessary neutrality and professionalism through barriers to politicisation of bank operations. It would also deepen markets for pricing and liquid disposal of assets by extending beyond one country’s remit. Additionally, having a non-national trustee for publicly held banks and bank assets would reduce the risk of either institutions being held too long in the public sector or there being a race to the exits once one state decided to privatise – both risks real and harmful in the absence of European co-ordination.
The Bank Treuhand would have no need for a unanimity requirement, as only some European countries would have to join to make it work. We think the critical mass would include Austria, Belgium, France, Germany, Italy and the Netherlands, plus possibly Spain and Sweden.
The hope that a combination of green shoots and a steeper yield curve will cure European banks’ current ills is dangerous, magical thinking. Waiting does not reduce the need for triage, but only increases the ultimate cost.
Setting up a European Bank Treuhand is the way to unlock policy action, prevented by the competing incentives of national governments. Otherwise, it will be Europe that will risk the repeat of Japan’s lost decade.

The writers are the deputy director of the Peterson Institute for International Economics and a research fellow at Bruegel, respectively.

This op-ed was published in the Financial Times.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Upcoming Event

Oct
23
12:30

Europe: Back to the future of a political project

This event will feature a discussion on different ideas for reforming European Governance.

Speakers: Ulrike Guerot, Adriaan Schout and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The international use of the euro: What can we learn from past examples of currency internationalisation?

The recent State of the Union speech by Jean-Claude Juncker sparked a discussion about the potential wider use of the euro on the international stage. Historically, it is not the first debate of this kind. Emmanuel Mourlon-Druol analyses four previous cases of debates on international currencies to reveal the different scenarios associated with their greater use, as well as the need to have a clear objective for a currency’s internationalisation.

By: Emmanuel Mourlon-Druol Topic: European Macroeconomics & Governance Date: October 15, 2018
Read about event More on this topic

Upcoming Event

Nov
16
09:00

EU Financial Markets: East Meets West

Banking and financial regulation in the East and the West: links, differences and future.

Speakers: Nicolas Véron Topic: Finance & Financial Regulation Location: Collegium Iuridicum II, Lipowa 4, Hall A3, Warsaw, Poland
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: How does Italy’s budget fit with EU fiscal rules?

In this Director’s Cut of ‘The Sound of Economics’, Guntram Wolff welcomes Bruegel research fellow Grégory Claeys to assess how the new Italian budget proposals measure up against the existing EU fiscal rules.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic More by this author

Opinion

Greece: What to expect after the bail-out

After being under the close scrutiny of three financial assistance programmes since May 2010, Greece has finally left the bail-out in August 2018. How different is the post-bail-out era from the preceding eight years? Will Greece be able to stand on its own? And how might the country improve its economic outlook? In this post, which summarises a presentation recently given at an Athens conference, the author answers these three questions.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Blog Post

Improving the efficiency and legitimacy of the EU: A bottom-up approach

The 2019 European elections promise to be a watershed moment for the EU. A recent Bruegel paper made the case for restructuring the Union’s model of governance and integration. The authors of this post critically assess this proposed institutional engineering, and argue for the principle of “an ever closer union” to be safeguarded by a bottom-up approach to respond to the common needs of the citizens.

By: Silvia Merler, Simone Tagliapietra and Alessio Terzi Topic: European Macroeconomics & Governance Date: October 9, 2018
Read article More on this topic

Blog Post

Italy’s new fiscal plans: the options of the European Commission

The Italian government has announced an increase of its deficit for 2019, breaking the commitment from the previous government to decrease it to 0.8% next year. This blog post explores the options for the European Commission and the procedures prescribed by the European fiscal framework in this case.

By: Grégory Claeys and Antoine Mathieu Collin Topic: European Macroeconomics & Governance Date: October 8, 2018
Read article More by this author

Blog Post

Financial panic and the Great Recession

A debate on the roles of financial panic in the Great Recession has been pitting Ben Bernanke against Paul Krugman in what has been characterised as “the battle of the beards”. Other economists have joined the discussion on the new American Economic Association’s discussion forum.

By: Silvia Merler Topic: Finance & Financial Regulation, Global Economics & Governance Date: October 8, 2018
Read article More on this topic More by this author

Blog Post

One club does not fit all in Europe

In this column, Jean Pisani-Ferry argues how the EU can become a more effective global player, following the Policy Brief "One size does not fit all: European integration by differentiation.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: October 2, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: Is economics asking the right questions?

Bruegel deputy director Maria Demertzis welcomes Financial Times commentator Martin Sandbu to explore the journey taken by the field of economics since the financial crisis struck 10 years ago, and discuss what new tools economics has now that it didn’t have then.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: October 2, 2018
Read article More on this topic More by this author

Blog Post

Digesting the Salzburg Summit

As the moment of truth for Brexit negotiations is approaching, with the October European Council around the corner, we review opinions on the outcome and meaning of the Salzburg summit.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: October 1, 2018
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: The Italian government budget proposal for 2019

Guntram Wolff welcomes Bruegel affiliate fellow Silvia Merler to evaluate the Italian government’s planned budget for 2019, in this Director’s Cut of ‘The Sound of Economics’

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 28, 2018
Load more posts