A ‘bad bank’ could be a good for Europe
This editorial appears on Bloomberg View:
Some European regulators have come up with a viable plan to alleviate the region’s chronic financial paralysis. If only European politicians, particularly in Germany, would listen.
The European Union’s leaders have spent much of the past decade debating — but never fully resolving — what to do about the huge pile of bad loans that EU banks are sitting on, most recently estimated at more than 1 trillion euros. Nobody knows how large the losses will ultimately be, and this uncertainty spooks investors, inhibits new lending and undermines the European Central Bank’s efforts to support growth.
Now, a group of officials at the European Banking Authority — with the support of colleagues at the ECB and the euro area’s bailout fund, the European Stability Mechanism — has put forth a proposal that could help: Create a publicly funded, Pan-European “bad bank.” Its aim would be to dispel uncertainty by determining the fair value of the soured assets and, with the help of private investors.
The plan has several advantages. By forcing banks to recognize losses, it could trigger a much-needed restructuring of Europe’s overcrowded banking sector: Unhealthy banks would have to either raise more capital or shut down. By averting a fire sale into illiquid markets, the plan would limit system-wide losses and make the whole reckoning less painful. The bad bank could even turn a profit for the European governments that provided its capital.
Unfortunately, the EU’s largest member, Germany, has withheld support for the plan, apparently on concerns that its contribution would go toward bailing out banks in other countries. To which one can only ask: That’s the point, isn’t it? Part of the purpose of a Pan-European bad bank is to enable the kind of risk-sharing needed to make Europe’s banking union and common currency viable
Granted, a lot depends on execution. The plan shouldn’t delay Italy’s ongoing effort to shore up its banks, and it should require all banks to raise the equity capital needed to make the system more resilient. If that’s the goal, Germany should give it a chance.