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US bank crisis
alarms Europeans
From __________________________________________________________________________________
By Duncan Bartlett
Europe business reporter, Brussels
The deepening crisis in the US banking system is causing alarm in
Europe.
There are worries that if a huge European bank, equivalent in
importance to Lehman Brothers, faced failure, there would be no way
to rescue it.
Up to now, it has been down to individual European governments to
come up with the money to keep troubled banks afloat.
Recent examples include Northern Rock in the UK, Rosklide in Denmark
and Germany’s IKB.
However, those banks are relatively small compared with the huge
cross-border financial institutions that have developed in the past
decade.
If one of those faced bankruptcy, it would cost tens of billions of
euros to rescue it, perhaps even hundreds of billions.
Governments would balk at the price and voters would ask why the
French or British taxpayer, for example, should pay to support a
bank that does most of its business in other countries.
Political squabbles
One option to share the burden of the banking crisis is to ask the
European Central Bank to take on the responsibility for bailouts.
That would be a major new role which goes beyond its present brief.
It would not be easy to arrange.
Firstly, the ECB would have to amass a large fund to handle such
rescues.
If and when it did step in, there would almost certainly be
political squabbles about which countries’ banks it should help and
how much money it should offer them.
However, the ECB is constantly monitoring what is happening in the
financial sector in a way that individual governments cannot.
They often do not have the expertise or the information to check the
financial health of big banks, especially those with complex
international operations.
“It is very difficult to see through the accounts to assess the
level of risk,” says Nicholas Vernon an economist at Bruegel, a
Brussels-based research group.
“There have already been many surprises and now due to the
environment with Lehman Brothers, we are likely to have other
surprises down the road.”
The answer, he thinks, is to develop better communication links
between all the teams that supervise the banking industry across
Europe.
This was a plan supported by Europe’s finance ministers when they
met in Nice at the weekend.
However, with the banking crisis gathering momentum in the US, it
may not be long before Europe is forced to make some tough and
expensive decisions about how to ensure its banks avoid a similar
fate.
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