A solution for Europe's banking problem. Bruegel Policy Brief No. 2009/03, 12 June 2009

Nicolas Véron and Adam Posen believe Europe should build new long term European joint-action to face the likely high rising number of insolvent banks on the continent. The authors propose on the one hand, a centralised triage and restructuring process of bad European banks lead by a new temporary European Institution, a European Bank Support Authority (EBSA), and on the other hand, long-term EU Institutions dedicated to the completion of an integrated market. Unprecedented state intervention on both sides of the Atlantic since October 2008 has prevented outright financial breakdown. But as long as many of its banks are insolvent or likely to become so, Europe will suffer continued economic misery, given the predominance of traditional banking in corporate finance and household savings on the continent. A lesson from major past crises is that the drag on growth will persist until the most fragile banks are openly identified and fixed. Such a process always requires great political will. In Europe, the challenge is compounded by institutional mismatch, namely the combination of a largely integrated market with national supervisory structures. Because of cross-border linkages, national approaches cannot be expected to deliver the necessary unbiased results.