A Euro TARP Can't Work ... Yet

Rumors are circulating that the Treasury department is pushing for a TARP-style bailout of the European banking sector. Charlie Gasparino of Fox Business News is responsible for this latest rumor, but there are lots of problems to a European TARP or bank recapitalization. Here is why...

First of all, Europe does not have a pan-European banking authority. Each country is responsible for regulating its banks, as compared to the US, where both federal and state level regulators monitor banks. For example, the US has the FDIC, the SEC, the Fed, and local regulators who all closely watch banks. There is no FDIC and no deposit insurance across Europe, and this raises questions.

First of all, who would be responsible for distributing the bailout funds? Without a pan-European institution to backstop the banks, the Eurogroup would be forced to dole out funds to each government. However, they would have no mechanism to recoup the funds and would not be able to have a say over which money goes where. What is needed before a Euro-TARP is a pan-European banking authority and deposit insurance, both of which are up for debate the European Commission meeting at the end of the month. Both are unlikely to come into existence at that meeting, but talks of their development could quell fears.

To be honest, any Euro-TARP, based on the speed of other programs created by the European leaders, would probably role out so slowly that it would be obsolete by the time the banks finally receive the money. What is needed is for the ECB to take control and become a lender of last resort, to backstop the banks, and take the burden of off Germany. The Fed has acted as a lender of last resort, which was one of the reasons that US banks stayed solvent in 2008, and the ECB needs to take this tone. Germany has been the lender of last resort but now it is the ECB's turn to take over.

If the ECB would step up and say that it will protect deposits for EMU banks until such a scheme came to fruition, this was would be a large plus for the European financial system. Markets would surely rally and a recapitalization program would surely be imminent. All in all, a Euro TARP is not a viable alternative but with the right infrastructure, could become one.