Banking and Public Finance as a European Challenge

In response to the European financial crisis and recession that began in 2007, the monetary union member states, the major central banks, and the ECB itself embarked upon an unprecedented effort to stabilize and inject liquidity into financial markets. The result of these activities is the European sovereign debt crisis as well as a portfolio structure in the banking industry that is characterized by a high percentage of credit to the public sector. This situation has been exacerbated by the special regulatory privileges granted for such assets. This paper proposes a strategy to reduce the dominance of public debt in the banking sector and to coordinate the bank restructuring process. The approach includes the option of setting up a European framework for national asset management vehicles. The core idea of this approach is to create national “bad banks” to hold distressed assets and make the “deleveraged” banking institutions fit for the future.