FRANKFURT, Germany – In Europe, the zombie hunt is on.
Not for undead humans, that is, but zombie banks – the walking dead among lenders, too financially troubled to lend money to an economy that desperately needs investment, growth and jobs.
The European Central Bank, the lead crisis-fighter for the 18 countries that use the euro, is embarking on an extensive search through the books of the biggest banks. It’s an arcane exercise – but one whose results will affect people’s jobs, businesses and lives. The idea is to restore the system’s ability to lend by weeding out lame banks.
Previous efforts in 2009, 2010 and 2011 – by other EU offices with fewer powers – didn’t do the job. Some banks passed simulated stress tests on paper but needed bailouts soon afterward. So the ECB is putting its reputation on the line.
Together with national regulators and the European Banking Authority, the ECB will first go through thousands of files from 128 of Europe’s largest banks to hunt for hidden, soured loans and investments. That will be followed by stress tests that simulate how a bank would fare in a recession or crisis.
Once the verdict is delivered in October, national bank regulators will be asked to push problem banks to raise capital by selling new shares to investors, restricting dividends – or even by being restructured or bailed out. That should help the economy in the long run.
But it’s tricky. Forcing banks to fix their problems could temporarily destabilize financial markets and cost investors and governments more money.
Here we go again
This is Europe’s latest try at sorting out the problems in its banking system left over by the global financial crisis and Europe’s ensuing turmoil over government debt. The United States tackled its banking troubles earlier, in 2008-09, pushing banks to take new capital from the government. That helped the U.S. recover from the recession.
At the height of their debt crisis in 2012, European leaders decided to create a centralized supervisor to oversee banks. The idea was to take regulation away from national officials, who can be overly protective of their domestic financial institutions. They gave the job to the ECB, which now needs a clean slate in the banking industry before its supervisory board takes over the function in November.
Brother, can you spare a loan?
Because so many banks are still in financial trouble, they are not able to lend much to businesses and households. That’s preventing the economy from growing and reducing unemployment from a painful 12 percent.
For instance, a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes they’ll eventually pay. But that means the bank may not have money to make new loans.
In particular, it is small- and medium-sized companies that can’t get the credit they need. Yet it’s those companies that provide some 80 percent of the jobs.
Bad loans are a particular target. The ECB and EBA say anything more than 90 days overdue will be considered a bad loan, whether the bank has declared it in default or not.