“Ultimately, they need a central authority providing equity behind the banking system’s liabilities,” Millstein, the former U.S. Treasury Department chief restructuring officer who started the turnaround advisory firm Millstein & Co., said in a panel discussion at Bloomberg’s Dealmakers Summit in New York today. “The large European banks are actually more leveraged than our banks were at the beginning of the crisis.”
TARP is the Treasury Department’s Troubled Asset Relief Program, a $700 billion bank-bailout fund that provided capital injections to firms including Citigroup Inc. (C) and Bank of America Corp. during the financial crisis. European banks are struggling to fulfill a pledge made last year to cut more than $1.2 trillion of assets to help them weather the sovereign-debt crisis, stoking investor concern about financial stability.
“The traditional model in Europe for the banking system is bust,” said Studzinski, senior managing director and global head of Blackstone Advisory Partners LP, citing the dependency of companies on banks as well as the structure of large banks and local state-owned lenders. He also called for a TARP-like program for the region’s banks.
“You need some sort of pan-European deposit guarantee system” to slow down the flight of capital, said billionaire investor Wilbur Ross, speaking at the same event. He called it a “conceptual error” to try to impose new Basel III regulations while simultaneously asking banks to lend more. “It’s not going to work.”
While European leaders earlier this month committed to their goal of establishing a euro-area bank supervisor by year- end, every element of the bank overhaul has drawn debate back to the fight over who should pay when a lender fails. The EU has already scrapped plans to centralize bank deposit insurance in the near term, instead asking each nation to set up its own system.
European countries from Germany to Spain need to cede sovereignty on everything from bank supervision to taxation and there must also be a focus on job creation and growth to overcome the euro crisis, Millstein and Studzinski said.
“The growth problem is real, and it could create the political conditions where the euro does not survive, and that’s my fear,” Millstein said.
Still, Millstein, Studzinski and Ross agreed that the U.S., despite having a more centralized decision-making process than the European Union, has also failed to tackle its own deficit problem.
The U.S. doesn’t have the credibility to suggest a solution to Europe’s debt crisis because it needs to fix its own problems first, said Ross. “We haven’t done such a good job of our own.”
A 2011 deficit-reduction agreement between President Barack Obama and congressional leaders created the so-called fiscal cliff of $607 billion in spending cuts and tax increases set to start in January unless Congress acts to stop it.
“The crisis now is so real, and the urgent need for action in Washington is so real -- they put it off, put it off and now they are going to have to deal with it one way or the other,” said Millstein.
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