Fixing Europe’s banks
Cleaning the Augean stables
The ECB starts the Herculean task of repairing Europe’s banks
CONSTRUCTION cranes tower over the angular glass facets of the new headquarters being built in Frankfurt for the European Central Bank (ECB). Yet by the time the building is finished its acres of office space (twice as much as in its present downtown digs) will be too small to accommodate the expanding remit of the ECB. This week it lifted its shovels to begin the new task of cleaning euro-zone banks’ balance-sheets of their bad loans.
Its first step will be to try to get a measure of just how much bad debt there is through a close examination of the assets. On October 23rd it gave some details of how it will do this in an “asset-quality review” and what standards it will expect banks to meet. These revealed something of the fierce arguments that have taken place recently within the ECB and the compromises it has had to swallow. The ECB needs to be tough on banks to restore confidence—yet not too tough. If it reveals capital shortfalls so large that filling them would destroy the public finances of struggling countries then it may undermine confidence rather than restore it.I