FRANKFURT — All Ignazio Angeloni has to do is figure out the European banking system.
Angeloni, 59, is head of the European Central Bank’s financial stability division, giving him a lead role in a task about to get underway: examining the books of the 130 or so largest banks in the 17-member euro currency union. It will be a financial triage aimed at figuring out which banks are sound and which are not.
Over the past few years, the world’s financial institutions have become black boxes, so opaquely complex that they are little understood by regulators or their own executives. Lehman Brothers vanished in a puff of financial wizardry gone wrong. JPMorgan Chase was humbled when it lost control of its own traders in London. And European regulators gave the French-Belgian banking giant Dexia a clean bill of health in 2011 after a supposed “stress test,” only to see it collapse a short time later.
This week, Angeloni and other central bankers are expected to reveal details of the banking review process. The undertaking, at the behest of the European Union, is meant to place the big banks of Europe more directly under the supervision of the European Central Bank, instead of the current patchwork of national regulators. At stake is the world’s confidence in Europe’s banking system. If the effort fails, it could undermine Europe’s fragile economic recovery and perhaps the credibility of the European unity project itself.
“You have to supervise what banks do,” Angeloni said during an interview at the central bank’s headquarters here. “You cannot leave them alone, because if you do, they can become dangerous.”
The banks of Europe, of course, are particularly treacherous. The ones in Greece were crippled by their government’s toxic debt. The ones in Cyprus were “bailed in” by their own depositors. The ones in Spain have sucked in billions of euros in aid to make up for bad loans. And several banks across Europe have become wards of the state. So can anyone really make sense of it all?
“There will be mistakes; there will be things that are not uncovered fully,’’ Angeloni said. “The goal is to make as much progress as possible.”
James Chappell, a banking analyst at Berenberg, called the banking review “incredibly important.”
“Ultimately, for a banking union you need to have a credible supervisor, and investors want to have trust in banks’ balance sheets, and that’s what’s been lacking and continues to lack now,” he said. “What the market has to believe is that the process has been credible.”
From the window of Angeloni’s downtown office, one can see the future headquarters of the European Central Bank rising on Frankfurt’s horizon. The grand skyscraper, bracketed by cranes, is a testament to the central bank’s growing role as a world power.
The unwieldiness of some banks, Angeloni said, is a symptom of technological advances that have led to nano-second trading and the use of complex computer algorithms that guide investment decisions. And while he expressed doubts about the usefulness of splitting up the investment and retail arms of banks, as many on both sides of the Atlantic have advocated, he still suggested that some banks had grown too complex for their own good, or for society’s.