Should Europe adopt the US model to get its banks out of a crisis, asks SIG’s Gillham

Anthony Gillham, portfolio manager fixed interest at Skandia Investment Group, sees the US TARP programme providing a model for stabilising Europe’s banks.

So the ECB has turned down a Spanish proposal to inject €19bn into Bankia on the grounds that it might breach EU financing rules.

This disagreement is unwelcome as Spain and the EU need to come up with a cohesive plan for they intend to get more capital into the banks and to convince the market that it will work, rather than airing grievances in public.

Resolving the banking crisis is a key issue for the Euro zone. Banks matter, not least because they are an important transmission mechanism of monetary policy to the economy via loans. This mechanism is broken, a situation which is acute amongst some Spanish lenders which have high levels of impaired assets on their balance sheet built up during Spain’s property boom.

Injecting fresh capital frees up banks to move from balance sheet repair mode back to lending which in turn boosts growth. Amid austerity in Europe, this is important. The €19bn ear marked for Bankia is a not inconsiderable sum and would likely have put capital levels back on a more sustainable path.

The situation is not beyond the wit of the authorities to resolve. Capital requirements for Banks in Spain and Italy can probably be solved by the European Stability Mechanism (ESM) in a process that could be analogised with the US TARP.

The evidence from the US that repairing bank balance sheets is compelling. While low, there is positive GDP growth in the US. A key reason is that banks are in a better shape following balance sheet repair that occurred under TARP. What better way to put European debt dynamics on a more stable footing than to return the area to growth by recapitalising its banks?

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