While the recent 'credit crunch' is still troubling financial markets across the globe, current research is questioning Europe's readiness to deal with solvency issues after a potential banking crisis, which could come as a massive blow to the European economy as the banking sector makes up for almost a quarter of total market capitalisation, the researchers said.
"Looking at the pattern of crises, it will happen some day," warns Bruegel's Nicolas Véron, an expert on accounting and financial regulation, who has been an adviser to France's labour minister between 1997 and 2000. The paper, published on 31 August 2007, argues that with the emergence of "pan-European banks, Europe's arrangements for financial stability have become inadequate".
The main problem identified by Véron is that while EU financial integration has progressed at an accelerated pace, its financial stability arrangements remain largely at national level. In case of a failure, co-ordination between national authorities would not be fit adequately to deal with the situation.
Véron argues that a two-tier framework of EU-level and national prudential arrangements and institutions is necessary. EU-level co-operation would be applied,in which banks hold a certain number of European assets outside their home country, thus targeting institutions with large cross-border operations, such as Unicredit, Deutsche Bank and Satander.
The European banking industry has seen an acceleration of integration with European banks increasingly operating in other countries within the EU. The ABN takeover battle is an illustration of this ongoing consolidation process.
