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24-08-2008, 04:00 AM

Aug. 23 (Bloomberg) -- European officials have an ``urgent'' need of plans to cope with a failing bank, particularly in countries where lenders' assets exceed the size of the economy, according to a paper presented today at an annual Federal Reserve conference.

Failure of a large bank in Belgium, Switzerland or a similar country would require cooperation across borders to avert broad economic damage, Franklin Allen of the University of Pennsylvania and the University of Frankfurt's Elena Carletti wrote in the paper.

The paper comes four months after the European Union set aside the question of who pays if a multinational bank needs a bailout to prevent an economic shock rippling across borders. European banks have been roiled by the credit crisis that was sparked by rising defaults on American subprime mortgages.

``The prospect of contagion could effectively freeze many European and some global capital markets with enormous effects on the real economy,'' the professors said in their presentation to the symposium in Jackson Hole, Wyoming.

Fed Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and other officials are exploring ways to revive credit following the collapse of the subprime- mortgage market, as well as mechanisms for averting another financial crisis.

Failure Scenarios

European governments should quickly prepare to address the collapse of a financial institution, Allen and Carletti said. They looked hypothetically at the possible consequences from trouble at Fortis, Belgium's largest financial-services firm, and UBS AG and Credit Suisse Group AG of Switzerland.

Were Fortis to fail, Belgium's government would probably be ``unwilling to intervene and assume fiscal responsibility because of the large size of the burden,'' Allen and Carletti said. ``The key issue would be how the burden would be shared between countries of the European Union.''

UBS and Credit Suisse, whose assets are ``significantly in excess'' of Switzerland's gross domestic product, pose a ``classic example'' of the hazards from inadequate government cooperation. The International Monetary Fund or Bank for International Settlements may be necessary to cope with a meltdown of the institutions, the authors said.

The alternative to joint preparations by governments ``is to wait for the catastrophe to occur,'' Allen and Carletti said.

April Meeting

EU finance ministers and central bankers meeting in Brdo, Slovenia, signed an agreement April 4 on how to cooperate in guarding against and responding to any market meltdown. The accord filled in lines of authority among responders to a cross- border crisis, without setting rules for splitting the bill.

Separately, the authors said a Fed program allowing financial institutions to swap as much as $200 billion of Treasuries for mortgage bonds and other debt allows firms to ``window dress'' their balance sheets at the end of a quarter.

From:

Bloomberg.com: Economy

Time to look at funds you hold in EU banks, or indeed in EUROs at all?

24-08-2008, 04:00 AM	#263 (permalink)
bkkandrew Guest Posts: n/a	And in the EU, no-one has any idea what to do with collapsing banks... Aug. 23 (Bloomberg) -- European officials have an ``urgent'' need of plans to cope with a failing bank, particularly in countries where lenders' assets exceed the size of the economy, according to a paper presented today at an annual Federal Reserve conference. Failure of a large bank in Belgium, Switzerland or a similar country would require cooperation across borders to avert broad economic damage, Franklin Allen of the University of Pennsylvania and the University of Frankfurt's Elena Carletti wrote in the paper. The paper comes four months after the European Union set aside the question of who pays if a multinational bank needs a bailout to prevent an economic shock rippling across borders. European banks have been roiled by the credit crisis that was sparked by rising defaults on American subprime mortgages. ``The prospect of contagion could effectively freeze many European and some global capital markets with enormous effects on the real economy,'' the professors said in their presentation to the symposium in Jackson Hole, Wyoming. Fed Chairman Ben S. Bernanke, European Central Bank President Jean-Claude Trichet and other officials are exploring ways to revive credit following the collapse of the subprime- mortgage market, as well as mechanisms for averting another financial crisis. Failure Scenarios European governments should quickly prepare to address the collapse of a financial institution, Allen and Carletti said. They looked hypothetically at the possible consequences from trouble at Fortis, Belgium's largest financial-services firm, and UBS AG and Credit Suisse Group AG of Switzerland. Were Fortis to fail, Belgium's government would probably be ``unwilling to intervene and assume fiscal responsibility because of the large size of the burden,'' Allen and Carletti said. ``The key issue would be how the burden would be shared between countries of the European Union.'' UBS and Credit Suisse, whose assets are ``significantly in excess'' of Switzerland's gross domestic product, pose a ``classic example'' of the hazards from inadequate government cooperation. The International Monetary Fund or Bank for International Settlements may be necessary to cope with a meltdown of the institutions, the authors said. The alternative to joint preparations by governments ``is to wait for the catastrophe to occur,'' Allen and Carletti said. April Meeting EU finance ministers and central bankers meeting in Brdo, Slovenia, signed an agreement April 4 on how to cooperate in guarding against and responding to any market meltdown. The accord filled in lines of authority among responders to a cross- border crisis, without setting rules for splitting the bill. Separately, the authors said a Fed program allowing financial institutions to swap as much as $200 billion of Treasuries for mortgage bonds and other debt allows firms to ``window dress'' their balance sheets at the end of a quarter. From: Bloomberg.com: Economy Time to look at funds you hold in EU banks, or indeed in EUROs at all?