Moment of truth for the banks

When America stress tested on its banks in 2009 it helped end the panic on Wall Street. The Federal Reserve opened banks’ books, imposed a consistent view about how bad losses might be and forced banks that lacked capital to raise more, with the taxpayer acting as a backstop investor.

The EU will soon follow suit, with the results due on July 23rd. Yet whereas America’s tests were run in military style, Europe’s efforts have been chaotic—more akin to a row about cod quotas than the recapitalisation of the world’s biggest banking system.

Banks and transparency are not always a good combination. When a carmaker admits it has a problem, its factories are still there a week later; when a bank does so it usually suffers a devastating run. This is why regulators sometimes like to deal with dud banks in secret. But when there is already a widespread loss of confidence, sunlight is the only treatment left. That happened in Japan in 2002-03, when zombie banks were prodded to own up to their bad debts, and in America last year. Europe has reached a similar point. Read the full article inThe Economist.

Financial supervision

Will new authorities have real powers?

Two years into the economic crisis, the European Union will shortly announce agreement on a system of financial supervision in a deal, which Dutch daily Trouwremarks “is typical of Brussels horse trading. Instead of a single regulator, we have decided to establish three: one for banks, one for insurers and one markets and securities. A solution that will allow London, Paris and Frankfurt, to lay claim to one of the new agencies.”

But the effectiveness of these supervisory bodies may prove to be a disappointment. As the Dutch daily points out, “with member states dragging their heels in a bid to retain control, negotiations will likely result in a compromise that will grant EU regulators the right to intervene but only in times of crisis. And it will be up to member states do decide if and when this is the case.” Trouw regrets that “in spite of the seriousness of the crisis, member states are still unwilling to recognise the need for a central authority. It seems that the main lessons to be learned from the memory of collapsing banks in the autumn of 2008 have already been forgotten.