by Nicolas Véron
Peterson Institute for International Economics
Policy Brief Number PB10-30
In the context of a transatlantic comparison, the first thing to be mentioned is the difference between the time sequence of financial reforms in the European Union and its equivalent in the United States. The financial crisis started simultaneously on both sides of the Atlantic, with the initial disruption of some financial market segments in August 2007 and the major panic episode of September through October 2008. But they are not at the same stage of policy reaction and especially regulatory reform now. At least four reasons can be identified for this difference.
The first major reason is the fact that beyond the first weeks following the collapse of Lehman Brothers, financial crisis management has been, on the whole, much simpler, swifter, and more effective in the United States than in the European Union so far. Specifically, the “stress tests” conducted by the US authorities in the late winter and early spring of 2009, though certainly far from flawless, triggered a significant recapitalization of those institutions at the core of the financial system, which in turn allowed some trust to return to the US interbank market in spite of numerous subsequent failures of smaller banks. In the European Union, the rebound in bank share prices that accompanied the US stress tests also allowed a number of banks to recapitalize under acceptable conditions, but these tended to be the relatively stronger ones, not those that most needed an overhaul of their balance sheets. A first wave of EU-wide stress tests was completed in September 2009 and had little, if any, measurable impact as its results were not disclosed to the public and not open to external scrutiny. In a second wave of stress tests, completed in July 2010, results were published but their quality, and correspondingly the consistency of the stress-testing process from one country to another, was later found to be severely wanting. As a consequence, EU stress tests so far have not performed the function of triage that would have effectively triggered the recapitalization and restructuring that are arguably indispensible to put the European banking system back on a sustainable track. A third wave of EU-wide stress tests is envisaged in early 2011.
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