Sudip Bandyopadhyay’s Blog

If it has been such a struggle for the Bush administration to command support for a financial rescue from its own side in Congress, how much worse would the situation be if pan-European action was needed to shore up the European Union’s banks?  More cautious Europeans  were looking at Europe’s vulnerable banks and asking what would happen if a big player stumbled.  Europe has many banks that are too big to fail; some fear that relative to national governments they are also too big to save.  At first glance, the rescue of Fortis by the Belgian, Dutch and Luxembourg governments looks reassuring.  The  authorities injected capital with impressive speed.  This matters: Fortis may not be a global household name, but it is the largest European Financial institution to be bailed out.  Its liabilities dwarf Belgium’s gross domestic product, it holds half that country’s deposits, and is Belgium’s largest private employer.  It clearly could not have been allowed to fail.

And yet it is hard to draw much general reassurance from the Fortis rescue.  The Benelux governments have their own shared economic union and some shared institutions; co-ordination between Greece and Ireland would not be so seamless.  As for Switzerland, home to UBS and not an EU member, it is easiest just to hope no problem arises.  We should rely less on the prospect of a coordinated bail-out and draw more reassurance from the fact that banks may be cheaper to save than they appear.  True, a Barclays or a Deutsche Bank, as random examples, have liabilities roughly equal to the GDPs of their home countries.  Yet they also have assets.  To wipe out all shareholder equity and then impose a cost even of 5 per cent of GDP would require some astonishing mis-steps on the part of a big bank.  Such institutions could be saved, if ever necessary, by national governments.  In a crisis, it is hard to see who else would. More worrying is the prospect of a national government saving a bank but cutting loose depositors of a subsidiary elsewhere in the EU.  The Fortis rescue is less a triumph for European institutions and more a reminder of the role of national regulators.  Fortis’s downfall was its attempt to purchase part of ABN Amro.  That hubristic move provoked alarm from the Dutch central bank, whose concerns were over-ruled.  A pan-European banking market is an admirable aim.  The flipside is that national governments, for now, write the cheques.