How Europe Can Save Its Banks

Europe is finally mounting a serious effort to restore confidence in a crippled banking sector that presents one of the greatest obstacles to the area’s economic recovery. Unfortunately, European leaders have yet to provide a good answer to the crucial question: What will they do with banks that are really in trouble?

As it prepares to take on the role of supranational bank supervisor, the European Central Bank has laid out a plan to subject banks to their first truly credible reckoning since the 2008 financial crisis. The three-part effort includes a comprehensive analysis of management and operations, a separate review of asset quality, and a new round of stress tests. By separating the strong from the weak, the ECB hopes to give investors the clarity they need to put their money back into Europe’s financial sector.