An increase in fiscal deficits and public debt places negative pressure on financial systems and growth prospects, eroding country creditworthiness.

The evolution of the crisis has, however, thrown European banks balance sheets into sharp focus.

Booms have similar characteristics strong growth in banks balance sheets and credit, and therefore a rise in leverage.

Such action would allow finance ministries (e.g., the US Department of the Treasury) a role in the process now reserved for central banks.

This reinforces the need for the development of e credit information and related e credit rating and scoring techniques in the developing and transition economies.

The Irish National Asset Management Agency (NAMA) was set up in 2009 to clean up Irish banks balance sheets.

For banks, the assets typically include commercial and personal loans, mortgages, construction loans and investment securities.

New financial regulations Basel 3 for banks and Solvency 2 for insurers are reinforcing these advantages.

External information providers offer evidence of creditworthiness, strengthen credit negotiations with banks and reinforce the position of SMEs relative to their competitors and business partners.

Banks balance sheets are systemically dangerous when bloated by leverage, and it is this that regulatory or fiscal policy should address through liquidity buffers and leverage ratios.

Nothing about financial intermediation justifies allowing banks to distort the economy and endanger the public as much as they do.

Bank balance sheets had been strengthened after the 1997 1998 financial crisis, and were unencumbered by the overvalued securitized assets and complex derivative securities that caused much of the damage to advanced country financial institutions.

In fact, the financial statements of mega banks are impenetrable works of fiction or wishful thinking.

The experience was a lesson for banks, regulators, central banks, and treasuries, which, not surprisingly, were unprepared to handle a comprehensive crisis.

For banks that have filings with the US Securities and Exchange Commission, the sum stands at an astounding 2.2 trillion.

Nearly every study points in the same direction a large boost in the too big to fail subsidy during and after the financial crisis, making it cheaper for big banks to borrow.

Central Banking s New Face

The tests were supposed to reveal the true conditions of banks saddled with unaudited toxic assets in housing loans and financial derivatives.

Clinton also refused to regulate credit default swaps, and the US Securities and Exchange Commission allowed banks to triple their leverage.

Lenders to banks will not bother worrying about what kinds of gambles and investments financial institutions are making, or whether regulation is effective.

When problems started to surface, the finance minister at the time initially claimed that the country would carry out the cheapest bank rescue ever.

A senior Italian banker once said that Italian banks would be hanged by the Ministry of Finance if they sold any of their government debt holdings.

Fiscal stimulus, near zero interest rates, two rounds of quantitative easing, ring fencing of bad debt, and trillions of dollars in bailouts and liquidity provision for banks and financial institutions officials tried them all.

In the single financial market, banks are allowed to take deposits anywhere, without local approval, if they are authorized to do so in one European country.

The massive regulatory failure exposed by the financial crisis that began in 2008 underscores the need to concentrate on reforms that provide the correct incentives to banks.

And, instead of combating this trend, northern European regulators are amplifying it by limiting financial institutions exposure to southern European banks.

The balance is not reported on the ECB s balance sheet, since it is zero in the aggregate, but it does show up on the respective balance sheets of the national central banks as interest bearing claims against, and liabilities to, the ECB system.

And, with banks balance sheets having been strengthened, it will be possible to restructure mortgage debts, bank debts, and other private sector debts without destabilizing financial systems.

The crisis affects non Europeans too for example, concern over the exposure of American banks and money market funds to troubled European banks is harming US financial markets.

A default by either of those large countries would have disastrous implications for the banks and other financial institutions in France and Germany.

It should be positioned at the center of international financial markets and provide an analytical platform, not only for central banks and finance ministries, but also for regulators, standard setters, and market participants.

Financial institutions with liquidity increasingly prefer to deposit their cash with the European Central Bank, which has had to resume its lending to banks.

The People's Bank of China has more financial assets than any single public institution, and is second only to the Federal Reserve System of the United States in terms of overall central bank assets.

The first priority should be international banks.

Should Central Banks Target Employment?

The Fed pays the banks 0.25 to keep them idle.

It is part of the European System of Central Banks (ESCB).

Banks immediate interest is to adjust to the new capital requirements and restore their balance sheets to financial health, which implies that they will use the ECB money in a way that enables them to meet this objective most cost effectively.

If no measures are taken to increase the minimum equity requirements for banks and other financial institutions, financial crises like the current one could recur.

But, while regulation must address the oversized bank balance sheets that were at the root of the crisis, the IMF is right not to focus excessively on fixing the too big to fail problem.

If banks and other financial institutions are to perform their crucial role in providing support for growth and employment, it is imperative that they take steps to regain the public s trust. But how?

Financial systems are bloated by implicit taxpayer guarantees, which allow banks, particularly large ones, to borrow money at interest rates that do not fully reflect the risks they take in search of outsized profits.

It loaned on little collateral to shaky banks.

So how do central banks dig their way out of this deep hole? The key is to sharpen the distinction between financial firms whose distress is truly panic driven (and therefore temporary), and problems that are more fundamental.

When the Fed buys Treasury bonds or other assets like mortgage backed securities, it creates reserves for the commercial banks, which the banks deposit at the Fed itself.