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A three-pillar firepower to solve the European sovereign crisis: A last chance! CEPS Commentary, 21 October 2011

Ayadi, Rym. (2011) A three-pillar firepower to solve the European sovereign crisis: A last chance! CEPS Commentary, 21 October 2011. [Policy Paper]

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    Abstract

    EU policy-makers, led by Germany, have a last chance to work together with the private sector to produce a comprehensive, multi-pillar framework to stop the pernicious spread of economic contagion from the sovereign debt crisis in Europe with its detrimental effects on the real economy and the society. The sovereign debt crisis and the turmoil in the banking sector have become intimately intertwined. Partial cures will not be strong enough to tackle the root cause of the disease, which has macro and micro origins resulting from the close relationship that has developed over decades between sovereigns and banks and been reinforced by the erroneous zerorisk weight treatment of the EEA countries under the Basel regulatory regime. Recent calls to increase core Tier-1 capital ratios (up to 9%) on all European banks without reconsidering the ratio’s design profoundly miss the point. The experience of Dexia, which had a core Tier-1 ratio of approximately 12.1% in 2010, seemingly superior to the 9%, reveals the limits of these capital indicators to assess a bank’s soundness.1 Therefore, creating unnecessary noise in the market may derail policy-makers’ efforts to solve the European sovereign debt crisis.

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    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Centre for European Policy Studies (Brussels) > CEPS Commentaries
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 21 Oct 2011 09:02
    Number of Pages: 6
    Last Modified: 21 Oct 2011 09:02
    URI: http://aei.pitt.edu/id/eprint/32633

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