In a new Bruegel Policy Brief co-authored with Adam Posen, we describe 'Europe's banking problem' as a high reliance of the European economy on a badly damaged banking system. History confirms the only way to solve it is 'triage', i.e. differentiation among banks on the basis of their actual capital position assessed through a consistent process and publicly disclosed, then restructuring of those banks which would not subsequently succeed to meet their capital needs.
But in continental Europe, advanced cross-border integration means that triage and restructuring cannot be effective if conducted only at national level. As no existing supranational institutions can realistically do the job, we advocate the creation of a temporary fiduciary agency or 'Bank Treuhand' by a critical mass of European countries. The Treuhand would assess major banks' balance sheets and publish triage results, catalyse restructurings by being a broker for negotiation among national governments, and manage distressed assets that would be brought into public ownership as the result. It would also buy time, and pave the way, for the longer-term task of reforming the EU's supervisory architecture in order to make cross-border banking sustainable.
Click here to download and read the Policy Brief as published by Bruegel (only in English).