Unlike the US, Europe failed to recapitalise its biggest banks following the financial crisis of 2007-09. Instead, policy makers gambled that economic recovery would lift the profitability of financial institutions, enabling them to increase their capital buffers over time. It is now clear that this strategy has failed. The eurozone is in a new recession and the depressed share prices of many banks signal that they are in dismal health.

In recent speeches, such as one on April 16, Klaas Knot, Dutch central bank president and European Central Bank governing council member, noted that restoration of banks’ balance sheets was a crucial requirement for economic recovery. To facilitate this process, Mr Knot stated, it was essential to create transparency about losses in the banking sector and to have an orderly resolution of lossmaking assets. Without this, banks would remain restrictive in making new loans. He added that the planned European banking union offered an appropriate opportunity for speeding up the resolution process.

We agree with Mr Knot’s analysis. Unfortunately, however, an orderly resolution of lossmaking bank assets is still a long way off, despite the fact that Europe has conducted several bank stress tests in the past few years.