Geithner presents timely challenge for EU banks
Michel Barnier wants Europe to be better prepared for the next financial crisis. But the EU’s financial market chief’s plan for bank taxes seems to miss the point. Timothy Geithner’s push for EU-wide stress tests raises questions of its own. But at least the U.S. Treasury Secretary has identified the core problem facing Europe’s financial sector.
The current euro zone crisis has its roots in sovereign debt. But concerns about banks’ exposure to risky sovereign debt have led to strain in the European inter-bank funding markets. There are also signs that U.S. money-market funds, which hold more than $500 billion of euro zone financial assets, are drawing back.
An EU-wide bank stress test could increase confidence. The United States did this last year when it forced the country’s largest banks to subject their balance sheets to a series of extreme scenarios, and to raise extra capital if necessary. The test, and the decision to publish the results, is widely credited with shoring up confidence in U.S. banks. The EU says it did something similar. But the results were never made public, and the tests do not appear to have triggered much bank capital-raising.
True, EU-wide stress tests are easier said than done. There is no central regulator to design or mandate tests, so national supervisors must agree. Nor is there a central pot of cash like the U.S. Troubled Asset Relief Program available for bank recapitalisation. Indeed, the banks most in need of extra capital are likely to be based in the countries that are least able to afford it. And Greece, for example, might balk at allowing other EU governments to inject capital into its banks.
Geithner has reason to be concerned. A full-fledged EU banking crisis could quickly spread around the world and undermine the U.S. administration’s own efforts to shore up confidence. Adopting the U.S. approach may not be as easy as he suggests. But restoring confidence in the EU’s banks is one of the most pressing challenges facing policy makers. That is something new bank taxes — or short-selling bans — cannot achieve.