The Bank for International Settlements has just announced that national governments have done too little to clean up their banking problems, and it is right. The European Summit concluded that there can be no fiscal federalism to transfer funds between banking systems, were they to require recapitalisation. That is reality. It seems difficult to craft a policy responding to the first while abiding by the second. Yet, all recent systemic banking crises in developed countries (including the US savings and loans, Sweden and Japan in the 1990s) have only been solved when there was a government-led triage process, with state intervention to resolve the cases of insolvency.

Carrying out the needed Europe-wide bank restructuring without fiscal transfers between members is difficult, but not impossible. In A Solution for Europe’s Banking Problem, we propose the creation of a “European Bank Treuhand”, a fiduciary entity or trustee that would be created jointly by those countries where the main continental European banks are headquartered (the UK is a separate case, as most of its banks have only limited operations on the Continent). The Treuhand would have three tasks.