July 29, 2010
The empty condos may have been in Florida and the mortgages that financed them repackaged on Wall Street, but it was banks in Europe that got hit first by the subprime crisis. On August 9th 2007 the European Central Bank (ECB), not the Federal Reserve, stunned the financial world by making the first giant emergency loan to banks. Europe’s banking system relied more than any other on fickle borrowing markets that had dried up. Whatever the merits of their recent stress tests, that ongoing flaw explains why Europe’s banks may still battle to finance themselves.
Some firms are still being stigmatised, and have to borrow from the ECB even as American rivals have been weaned off public money. The unspoken assumption of the regulators’ stress tests, the results of which were announced on July 23rd, is that this is due to “one-off” problems: the risk that some governments in the euro zone might go bust and the perception that the murkier bits of the system, particularly unlisted banks in Spain and Germany, are hiding their risks. If reassured that banks have enough capital and are not fibbing, the logic goes, investors will start lending freely to them again. After all, the stress tests in America in 2009 helped restore confidence there.
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