Time for Europe-wide FDIC Fund – and Quick

By Roy Smith, Kenneth G. Langone Professor of Entrepreneurship and Finance and Professor of Management Practice

Roy C. Smith

Two things need to be done urgently: to secure the necessary ratification of the eurozone countries to authorise the European Stability Mechanism and to allocate a portion of its €500bn fund to a new deposit insurance fund similar to the Federal Deposit Insurance Corporation in the US.

While the €100bn Spanish bank bailout buys some breathing space, it is still little more than a sticking plaster for the eurozone crisis.

Investors and retail depositors remain nervous and may yet engage in panic withdrawals. This has been happening to bank deposits in the peripheral eurozone countries for some time but has recently begun to spread to the institutional sector.

Just reading the papers ought to persuade anyone with assets in Spain or Italy to send their money to the US, or Switzerland or Germany to avoid the risks of a euro collapse or bank failure.

It has been painfully difficult for the eurozone to find enough political agreement to head off a widespread bank run. But, if a run is not halted, the countries involved will be obliged to impose capital controls to prevent insolvency; the very essence of the European Union’s single market will be carried away with the currency.

Read full article as published in Financial News.