Resolving Europe’s banking crisis through market discipline: A note

Research output: Contribution to journalArticleScientificpeer-review

Abstract

Purpose
– The purpose is to analyse how the policy approach to the immediate problems in the European financial sector has long-term effects on implicit protection of banks' creditors and, thereby, on risk-taking incentives.

Design/methodology/approach
– The near term issues in European banking are discussed within a framework for long-term reform along the lines proposed for a European banking union.

Findings
– The author advocates conducting a thorough stress test with potential consequences for unsecured creditors of banks proven to be insolvent. Losses may have to be imposed on these creditors, following the example of recent cases in Cyprus and in The Netherlands.

Originality/value
– There is widespread consensus among international policy makers that the European banking system is seriously undercapitalized. Unlike the USA, Europe failed to recapitalize its biggest banks following the financial crisis of 2007-2009. It is now urgent to start recognizing losses on balance sheets to avoid a proliferation of Japanese-style zombie banks in Europe.
Original languageEnglish
Pages (from-to)413-418
JournalJournal of Financial Economic Policy
Volume5
Issue number4
DOIs
Publication statusPublished - 2013

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