Europe’s universal banks were supposed to be immune to the fallout from the subprime crisis. But we are now discovering that any financial institution is vulnerable if its leverage is too high. The key issue for Europe is not only that its largest banks are vulnerable because they have high leverage, but that they have grown too big to be saved by any single government.

The rescue of Fortis, the Belgo-Dutch banking and insurance group, illustrates vividly the difficulties of raising adequate defences against a fully fledged banking crisis in the eurozone. There was no European solution because the European Central Bank can only provide liquidity against collateral to keep the money market functioning, but has no powers to resolve a solvency crisis. In the absence of a European Treasury this can only be done by national authorities. But national authorities are responsible to their taxpayers and are thus reluctant to pay for the rescue of banks abroad. In the case of Fortis it was relatively easy to cut the bank into three pieces, but this would be more difficult with other large EU banking groups.