Europe needs to drop its resistance to non bank credit

Aca

The financial systems in the United States and Europe have long differed on an important aspect. In Europe, most of the credit flows through the banks. In the United States the bank channel is less dominant, and borrowers gain access to capital directly by issuing bonds or through “non-bank” intermediaries that do not take deposits and are not regulated as banks. An oft-quoted measure is that in Europe banks represent more than two-thirds of total credit, whereas in the United States the proportion is less than one-third. In the past few years of crisis, this difference has mattered decisively.

To begin with, the securitization of residential mortgages in the United States went wild in the mid-2000s and was the initial trigger of market turmoil in the summer of 2007. Many continental Europeans have concluded that their bank-based system was less risky or more virtuous. But the subprime securitization debacle, severe as it was, has been one part of a more complex story. Many European banks have made risk-management mistakes just as massive as the reviled originators of US securitization deals. Spanish or Irish banks anticipating a never-ending property boom, or failures such as Dexia in France and Belgium, Hypo Real Estate or WestLB in Germany, or RBS in the United Kingdom, are sad reminders that Europeans have no grounds to feel complacent about their own system.