Europe Needs to Face Its Bad-Loan Problem

Financial regulators in the European Union are grappling on several fronts with problems in their banking system. They’ve made some progress, but there’s a pattern: The proposals fall short. Plans for EU-wide deposit insurance have been watered down. The system for resolving failing banks is underfunded. And now controversy has arisen over new rules for dealing with bad loans -- rules that, despite the complaints, still aren’t as bold as they ought to be.

The European Central Bank wants lenders to recognize non-performing loans sooner, and make adequate provision against them. That would be good, because it would make banks financially stronger when the next downturn comes round.