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The most important financial crisis-related news this morning is not the tentative agreement on TARP-lite reached over the weekend in the USA. At best this is a holding operation that buys (a little) time for the US banking system while the industry and the authorities figure out how to recapitalise the banking sector. It is also not the nationalisation of Bradford and Bingley, a systemically unimportant UK bank specialising in residential and buy-to-let mortgages. B&B is less than half the size of Northern Rock (at its peak). The nationalisation demonstrates that the UK government will not let even the smallest remaining deposit-taking bank go under. By the British tax payer effectively underwriting the entire UK banking system, the authorities now may have a short window of relative calm to decide on the further consolidation and recapitalisation of the UK banking sector.
The most important development was, however, the rescue of Fortis through the Belgian, Dutch and Luxembourg governments taking 49% equity stakes in Fortis’s banking operations in each of these three countries. The ability of the euro area fiscal authorities to co-ordinate on a bail-out for a bank with not-only strong cross-boundary operations, but indeed with a strong multi-national (almost supranational) identity was untested until today. They passed the test. Everyone who mattered, the national monetary authorities, the President of the ECB, the national regulatory authorities, the three national ministers of finance and the President of the Eurogroup chipped in and played their part.
Especially remarkable is the fact that it took much less time and effort to put together the multi-country fiscal rescue effort of the three EU member states than it took to cobble together the son-of-TARP in the US. Incipient federalism triumphs over disfunctional established federalism.
A bad day for Benelux banking. A great day for European cooperation and unity.
Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.
