Monday, November 14, 2011

EconomicsEuroZone: Banks: Too big to fail, or too big to save?

Financial Times (UK) email newsletter FT Exclusive Comment (Nov14,2k11)

- Posted here by EconoMix

Sever the death spiral link
of banks and governments
The financial fate of Europe’s banks and its governments are inextricably linked: because the banks are the primary source of funding for government deficits, government debt represents a large proportion of the asset base of most eurozone banks. Insolvency of one therefore threatens insolvency of the other.

The prevailing narrative is that this symbiosis makes the largest European banks too big to fail, driving eurozone governments to provide massive capital infusions and guarantees to banks during financial crises. The truth, however, is that, given the level of eurozone government indebtedness and the relative size of Europe’s banks, Europe’s largest banks are now too big to save. 

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