Europe's Imperfect Agreement on Troubled Banks

An agreement reached by EU finance ministers early on June 27 over the rescue of troubled banks is another step toward the creation of a European banking union and intended to reduce the likelihood of governments needing to intervene. Under the agreement, bank investors and depositors will take on greater responsibilities in the event of a bank failure before governments step in with taxpayer money.

While the new rules reduce the direct burden on governments, they likely do little to ensure that a possible banking crisis would be contained within the financial sector. The agreement risks marginalizing financial sectors in troubled countries, especially since banks are already struggling to secure capital amid Europe's economic slowdown. In light of the larger perceived risk for bank investors and depositors under the new rules, troubled banks, especially in countries on the European periphery, will face greater capital flight.