Seeker Blog

More analysis by VoxEU economists Daniel Gros and Stefano Micossi. You thought the US financials were overleveraged? Very true, but hang on…

The radical moves in the US have direct implications for European banks and indirect implications for European governments. This column discusses the likely channels and notes that several European banks are both too big to fail and may be too big to be saved by their national governments alone.

…Too big to fail and too big to save?

The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euro, (more than Fannie Mai) or over 80 % of the GDP of Germany. This is simply too much for the Bundesbank or even the German state to contemplate, given that the German budget is bound by the rules of the Stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. The total liabilities of Barclays of around 1,300 billion pounds (leverage ratio over 60!) surpasses Britain’s GDP. Fortis bank, which has been in the news recently, has a leverage ratio of “only” 33, but its liabilities are several times larger than the GDP of its home country (Belgium).

Are European regulators living on borrowed time?

With banks that have outgrown national regulators and the financing capacities of national treasuries, European central banks and regulators are living on borrowed time. They cannot simply develop “road maps” but must contemplate a worst case scenario.

The ECB must be in charge; Britain and Switzerland should pray

Given that solutions for the largest institutions can no lounger be found at the national level, it is apparent that the ECB will need to be put in charge. It is the only institution in the euro that can issue unlimited amounts of global reserve currencies. The authorities in the UK and Switzerland — who cannot rely on the — can only pray that no accident happens to the giants they have in their own garden.