Avoiding Europe's Next Banking Crisis

Italy’s slow-motion banking crisis is getting worse, and if it isn’t stopped, it could cause system-wide damage across the euro area and beyond. To contain this danger, the European Union must be willing to bend some rules.

Shares in Italy’s third-largest lender, Banca Monte dei Paschi di Siena, are down about 75 percent this year and trading at one-tenth of book value. A ban on short-selling the bank’s stock was imposed on Wednesday. Monte dei Paschi is only one of a group of Italian banks beset with 360 billion euros ($398 billion) of nonperforming loans; that’s some 20 percent of Italy's gross domestic product.