Clean up eurozone banks, urges ECB

The eurozone must “get its act together” and restructure the bloc’s banks, a senior board member of the European Central Bank has warned. Benoît Cœuré said the euro area was now out of the immediate “danger zone” but added that it risked a Japanese-style stagnation unless its banking sector was cleaned up.

“In one direction lies the Japanese experience, and in the other direction that of emerging East Asia,” he said at the Asia Europe Economic Forum in Beijing. “Europe has emerged from the danger zone. It’s time for us to get our act together, to reform and to grow.”

The French economist hinted that Europe could suffer its own “lost decade” if policymakers did not reform its financial sector. “Following the bursting of Japan’s asset bubble, there was by and large no rapid write-down of non-performing assets,” he noted. “The recognition of losses was postponed and, as a consequence, capital continued to be allocated to investments with limited positive impact on Japan’s long-term growth potential.”

The ECB last week unveiled details of a new stress test for 128 of the bloc’s banks, ahead of the Frankfurt-based central bank assumption of formal regulation of the sector next year. The tests, which will review the quality of banks’ assets and the integrity of their balance sheets, will begin next month and conclude in October 2014.

Banks judged to be unsound will be required to raise new capital. The ECB has also urged governments to agree on a “single resolution mechanism” to wind down troubled lenders. “With such steps, and provided that sources of capital are clearly identified ... I firmly believe we can put the banking system on a sounder footing,” Mr Cœuré said.

He added that in order to secure its future prosperity Europe needed to “avoid protectionist temptations and calls for renationalisation”, and seemed to give his backing to the new EU-US trade deal that is currently under negotiation. “Europe should remain open to the world. Further progress on bilateral or regional free trade and co-operation in implementing the new financial regulatory standards are the best signal in this respect,” he said.