After several failed efforts to restore confidence in their sickly banks, European governments face growing pressure to change course and give the European Union more power to shore up the region’s shakier lenders.
Calls for a reassessment of current policy have been prompted by a new crisis in Spain, where the government late Wednesday took a controlling stake in Bankia, the country’s third-largest bank by assets, just as it confronted the country’s second recession in three years and continuing pressure from hostile bond markets.
But the growing clamor for action has raised a familiar issue: are national governments ready to surrender more power to the European Union or its agencies to salvage the euro?
Some of the main players now say openly that they should. Last month, Christine Lagarde, the managing director of the International Monetary Fund and a former French finance minister, called for a policy change so that the euro zone’s new bailout fund, the European Financial Stability Facility, could lend directly to struggling banks rather than solely to national governments.
“What we are advocating is that this be done without channeling through the sovereigns,” Ms. Lagarde said. Such a step might allow Spanish banks to tap money from the European Union, rather than the government being forced to accept aid, which might look to many observers like an international bailout.
The vice president of the European Central Bank , Vítor Constâncio, went further than Ms. Lagarde, arguing that the euro zone now needs its own bank supervisor and a fund to shore up — or wind down — troubled banks of the 17 European Union countries that use the euro.
The debate is central to the future of the European economy. While the bond market has traditionally been the main source of financing for companies in the United States, businesses on the Continent tend to rely on a patchwork of commercial lenders. The reluctance of weak banks to extend credit to corporations has helped to keep some European economies trapped in a downward spiral.
One of those economies is in Spain, where, after an enormous construction boom and bust, banks have struggled under a mounting burden of bad debt. Financial institutions have accumulated 323 billion euros ($418 billion) in real estate assets, of which 175 billion euros was labeled “problematic” by the Bank of Spain last year.
The government in Madrid is facing its fourth attempt in three years to restore confidence in the banking sector. One step is to rescue Bankia, the country’s largest real estate lender, which is sitting on 32 billion euros of troubled assets. In a statement issued late Wednesday, the Spanish central bank said the government would take control of Bankia’s parent company, BFA, by converting into equity a 4.5 billion euro loan it had given the financial group.
It added that the provision of public funds was being considered “to expedite the cleanup.”
The government is expected to go much further and order Spanish banks to set aside billions of euros more of provisions for bad loans, in addition to the 50 billion euros that the economy minister, Luis de Guindos, demanded in February. So far, the banks have set aside provisions for only about a third of the troubled assets they hold.
The government is also likely to outline a plan to allow banks to transfer their most impaired assets to government-guaranteed asset-management companies, mirroring the steps Ireland took in late 2009.
Spain's Two Mutually Reinforcing Problems
Clemens Fuest, research director of the Oxford University Center for Business Taxation, said that the weakness of Spain’s banks had a direct effect on the national finances because the government would have to finance any bailouts.
“These two problems are mutually reinforcing,” he said. “The national banking system is dragging down the government and vice versa.”
By contrast, Mr. Fuest argued, “California’s state finance crisis is not a serious problem for the ‘dollar zone’ because Californian banks don’t depend so much on the Californian state.”
Mr. Fuest is one of several academics who advocate the imposition of full-scale banking regulation at the European Union level and the creation of a banking resolution fund for the region.
In drafts of a forthcoming policy paper for the Center for European Policy Studies, Dirk Schoenmaker and Daniel Gros suggest that the European Banking Authority, which went into operation last year and brings together European Union and national banking supervisors, should be given the task of directly supervising cross-border banks. The European Central Bank should operate as lender of last resort for the region’s banking system and a European Deposit Insurance and Resolution Fund should be created, the draft paper says.
Britain, which has not adopted the euro, would most likely resist any such plan. Last week it battled with other European Union nations over its right to set higher capital requirements than those sought by the European Commission, the executive arm of the 27-nation bloc.
Britain argues that when banks fail, it is national taxpayers who pick up the check, so national regulators should have the power to set whatever capital requirements they see fit. As Mervyn A. King, the governor of the Bank of England, once said, “Global banks are global in life, but national in death.”
But the current system of European banking regulation, with its reliance on coordination among national supervisors, has so far failed to restore confidence in the financial sector. European bank stress tests in 2010 and 2011 were not considered credible because they did not highlight the looming problems in Ireland and Spain.
New structures have been created, including the European Banking Authority, although its powers are limited. The agency describes itself as “a hub and spoke network” of E.U. and national bodies that is intended to guarantee the stability of the European banking system.
The E.B.A has imposed a deadline of the end of next month for 28 larger banks, where shortfalls in balance sheets were identified late last year, to hold as a capital cushion a minimum of 9 percent of their assets.
At the same time, Michel Barnier, the European Commission member responsible for financial regulation, has said he will soon publish proposals for an E.U. framework on bank recovery and resolution. For those banks that operate across borders, this system would rely on coordination among national authorities.
Yet ideas for further-reaching integration within the euro zone are gathering pace and, according to Mr. Fuest, the stakes for the euro are high.
“If there is no willingness to give up national sovereignty in some key areas, maybe the currency doesn’t have a future,” he said.