Cross-Border Banking in the Balance

LONDON – The gravity of the eurozone crisis has finally sunk in. The stakes could not be higher. Governments and international financial institutions have scrambled to put together a solution within exceedingly tight political and economic constraints. Many questions have yet to be answered about the design; implementation will be at least as challenging.

Eurozone leaders must now aim to preserve not only the single currency, but also the gains from financial integration in Europe. No region of the world has benefited more from cross-border banking, yet these achievements are now at risk – and with them the European bank groups themselves.

The threat to cross-border banks comes not only from their deteriorating balance sheets in the face of lower sovereign-debt quality and weaker growth prospects, but also from the policy response itself. The fact that Europe’s banks need massive amounts of new capital is by now generally accepted. Yet, despite valiant attempts by the new European Banking Authority to mandate and coordinate the measures that are needed, a European solution must take account of the network of foreign subsidiaries across Europe.

Mobilizing support for European banks will be hard; extending it to subsidiaries will be even harder. But, unlike the ill-advised exposure to sovereign debt across Europe, cross-border banking through foreign subsidiaries has been beneficial for investors, and for home and host countries alike – nowhere more so than in emerging Central and Eastern Europe, still the most important export market for the eurozone.