Fast forward six months when it now appears that the European central bank came, saw.

According to Reuters sources, if the proposed rules are scrapped – as now appears likely – supervisors will instead “continue putting pressure on problem banks using existing powers.” In other words, the ECB will do nothing as matters revert to the state they were before the ECB pretended it could resolve the elephant in the European bank vault.

Of course, an ECB capitulation means that any further financial intergation in the Eurozone would come to a screeching halt: recall that for Europe's backstop, Germany, a clean-up of banks' balance sheets from toxic assets is the key precondition to agree on a common euro zone insurance on bank deposits.

These give banks seven years to provide for new bad loans that are backed by collateral and two for those that aren't.

Of course, the problem is that by leaving matters into the hands of politicians, the problem will only get worse, something even the ECB admits: “an impact-assessment study by staff in the ECB's monetary policy arm, which simulated the application of the “flow” rules on the full stock of unpaid loans currently sitting at euro zone banks, highlighted risks to the financial system.” So what will the ECB propose intead.

Categories: ZH