Chinese banks are being pushed to expand their role in global commerce.

First, governments should not be pushed into insolvency just to save all banks.

But turning them over to the government at market value doesn t improve banks balance sheet to do that requires overpaying for the assets, a transfer of wealth from ordinary taxpayers to the banks..

Uncertainty bred fear, causing banks, businesses, and households to hoard cash.

The inter bank market dries up, as banks lose trust in one another.

Banks in the eurozone came under pressure, and interbank tensions increased.

Governments have refused to reinstate the absolute wall of separation between commercial and investment banks, leaving taxpayers on the hook to pay deposit insurance claims when the bubble prone financial sector blows up.

This has pushed central banks away from their core competencies as they have been forced to use partial and imperfect policy tools for quite a long time.

That, in turn, merely drove down prices further, leading to more credit rationing, bankruptcies, and bank failures.

In the case of Europe, only now are banks being pushed to deal decisively with their capital shortfalls, leverage problems, and residual weak assets.

This period of expanding policy inconsistencies could prove to be temporary and reversible if central banks succeed in jolting economies out of their malaise, and if countries come to recognize that greater cross border policy coordination is urgently needed.

After all, if the economy is to grow again, banks need borrowers, but the recession has led entrepreneurs to cut their investments.

Perhaps their successful rescue of the banking system also misled some central bankers into believing that they possessed the Midas touch.

But how can we distinguish good banks from bad?

Improved central bank policy is another huge factor.

First, governments should not be pushed into insolvency just to save all banks. This means that the Irish government (maybe the next one) should demand that holders of bank bonds share the losses, perhaps by offering them a simple debt equity swap.

The chief point of intersection between the European and US approaches is major banks.

The reported abuse of micro credits to pay dowries is one alarming example.

That may be part of the story, but competition for talent and for customers seems intense between investment banks and others, yet they have collectively been extravagantly rewarded at the expense of those customers.

In the eyes of most observers, to reach the leaders goal of break ing the vicious circle between banks and sovereigns required centralizing authority for bank resolution and rescue.

Banks with substantial overhanging debt reduced lending, and, despite the massive intervention of governments and central banks, the crisis dragged down the global economy.

Market dominant banks still extract hefty fees on debit and credit card transactions from merchants, who are forced to pay a multiple of what a truly competitive market would bear.

As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.

Another breakdown of the interbank market is therefore very unlikely.

Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring if it has to put in money, it, of course, gains a stake in the future.

It will also use its new authority to pay interest on the reserves held by commercial banks at the Fed in order to prevent excessive lending.

Interbank relationships, as well as investment banking operations, are already highly international.

But larger banks can get into trouble when these two principles get mixed up.

One of the earliest applications of this strategy to economic policy is in the design of central banks.

And the interlinkages between major global banks are a major, if diffuse, worry for all involved.

The third, and probably most important, moral hazard results from asymmetric information between banks and their lenders.

This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced country central banks are failing to jump start economies and create more jobs.

This paid off in the war against Spain, 80 of which was fought at sea.

Other positive aspects notwithstanding, the presence of foreign banks is associated with currency mismatches.

One way to prevent this distortion would be to create a mechanism to bail out all banks with European money.

Excessive rural credit was one of the important causes of bank failures during the Great Depression.

In the aftermath of the financial crisis, it became fashionable for economists to decry the power of big banks.

One consequence of the ECB s large scale long term refinancing operation (LTRO) has been that Italian banks are once again buying Italian government bonds, and Spanish banks are buying Spanish bonds.

(c) Foreign exchange transactions

One principle does remain true central banks should try to keep the economy at near full employment by pushing asset prices up when unemployment threatens to rise.

But the contrast between bank profitability and the woes of everyone else turns up the political heat on the central banks, which have to explain why it is only their friends, the banks, who are standing under the helicopter when it drops money.

Certainly, governments should not guarantee interbank liabilities that do not affect customer deposits.

Loose lips sink ships is received wisdom in central banking circles.

Indeed, Santander and BBVA rank among today s most successful international banks.

Their first step should be to separate banks according to their compensation criteria.