c.2013 New York Times News Service

c.2013 New York Times News Service

FRANKFURT, Germany — Mario Draghi will soon get another job besides being president of the European Central Bank: chief zombie hunter.

If all goes as planned, by November European political leaders will anoint the ECB as supreme bank enforcer among the 17 nations that rely on the euro, with the power to separate healthy banks from the walking dead that are sucking the life from the region’s economy.

But even before the central bank has received the legal authority for its new role, questions are being raised about whether Germany and perhaps other countries could postpone critical parts of the European banking overhaul for political reasons, including a reluctance to pay for fixing or closing other countries’ banks. Any delays could prolong a deep economic slump for much of the eurozone that has dragged on for five years and driven unemployment to record highs.

This process may prove the most crucial test yet of how serious Europe is about creating an integrated financial system. “The delay in addressing the banking system is a major reason why Europe has had such a long period of stagnation,” said Zsolt Darvas, a senior fellow at Bruegel, a research organization in Brussels.

Last Tuesday, in a preliminary step, the central bank announced that it had hired the management consulting firm Oliver Wyman to help thoroughly review bank portfolios, to see which institutions are healthy, which are ailing but salvageable, and which are zombies.

Given the spottiness of banking oversight in Europe and the meager disclosure by banks, the public has had few ways to know the difference. Analysts assume that the sickest financial institutions are concentrated in troubled countries like Spain, Portugal and Italy. But France and Germany may also have banks whose problems are deeper than anyone knows.

As one indication of investor mistrust, European banks have a stock market value of only 70 percent of what their assets alone are worth, according to central bank figures. Europe’s inability to clean up its banks is also a big reason that the gross domestic product in the eurozone is still lower than it was in 2008, when the financial crisis began.

A big challenge, even if the banking supervision plan stays on schedule, is that there is no agreement on orderly procedures that would let officials close a zombie bank without creating the kind of market panic that followed the collapse of Lehman Bros. in 2008.


Still, if the review is successful it could rebuild confidence and help restore the flow of bank credit to eurozone businesses and consumers, without which a sustained economic recovery is probably impossible.

European Union officials said Friday that they hoped the law designating the ECB as bank overseer would be approved by government ministers in October, then formally published by early November, to take effect a year later.

Also Friday, the central bank officially began to search for a leader for the bank supervisory operation.

After spending the coming year hiring about 1,000 staff members and setting up operations, the central bank would then take direct responsibility for 130 of the largest banks, representing about 85 percent of 35.5 trillion euros ($48 trillion) in bank assets in the eurozone. National regulators would retain responsibility for about 6,000 smaller banks, but the central bank would have authority to intervene.


Not all European governments are enthusiastic. Britain, for instance, is still consulting with lawmakers about how its banking rules would be affected by the proposed changes.

Britain, with its pound currency, is not part of the euro union. But its banks will be subject to a parallel review by the European Banking Authority, which now coordinates among European bank regulators and in the future will work with the European Central Bank.

Other delays could come from Germany, as Chancellor Angela Merkel tries to form a new coalition government after her party’s recent victory in national elections. That could take weeks or months as Merkel tries to bridge ideological differences with the Social Democrats or Greens, both of which are to the left of her Christian Democrats.


Whatever the disagreements among European politicians, economists have no doubt that zombie banks are a drain on the economy. Such banks played a big role in the stagnation that gripped Japan for decades. To avoid having to book losses from bad loans and be exposed as insolvent, zombie banks continue lending to keep deadbeat borrowers afloat, rather than putting money into healthy businesses that create jobs.

Bank officials know that two previous reviews of eurozone banks failed to restore confidence because they were not stringent enough to reveal the most troubled institutions. The Franco-Belgian bank Dexia passed the so-called stress tests, conducted by the European Banking Authority in 2010 and 2011, only to subsequently encounter grave problems. Dexia ended up needing billions in taxpayer aid.

“This is now our third, and maybe our last, chance” to repair confidence in eurozone banks, Jörg Asmussen of the central bank’s executive board told reporters in Lithuania this month. “Without such a repair, a revival of credit provision by the European banking sector, which is essential for regaining growth, will simply not happen.”

But such a revival would also require European money for replenishing capital at banks where shortcomings are exposed. Among taxpayers in Germany, Austria and some other relatively prosperous countries, there is deep political resistance to the use of their money to recapitalize banks in Spain or Italy, where the governments may not be able to afford big bailouts.


The European Bank Authority estimated last week that the biggest banks in the EU will need about 70 billion euros in capital to meet new regulatory requirements. Other estimates are even higher.

Sharon Bowles, a British member of the European Parliament, leads the influential Economic and Monetary Affairs Committee. She said that if the stress tests next year found severe problems that states could not handle themselves, it might be necessary to tap the bailout fund, the European Stability Mechanism, which has a lending capacity of about 500 billion euros.

But that kind of aid could have strings attached — especially if the Germans and other Northern Europeans look askance at more bailouts for eurozone members seeking to deal with zombie banks.

“We could have a whole bailout package of the kind that governments hate because then they have to be told what to do,” Bowles said. “And they don’t like it.”