Europe's Banks Can't Do Draghi's Bidding

At the core of the European Central Bank's latest round of stimulus is a simple bet: that Europe's stress-tested banks can be nudged into increased lending. But what if the banks aren't nearly as healthy as ECB chief Mario Draghi insists? And what if companies don't want to borrow or depositors prove more fickle?

Europe clearly has both strong and weak banks, but the traditional role of the banking system in attracting short-term deposits and transforming them into lending has been slowly unraveling across the euro area. This not only makes it unlikely that the banks will act in the transmission role on which ECB measures depend, but it also increases the risk that capital is being misallocated. It's not hard to imagine how any of a number of worst-case scenarios could overcome today's relatively weak bank defenses.