Will Europe's banking 'big bang' loosen lending?

By Paul Taylor

In the biggest advance in European integration since the launch of the euro in 1999, the European Central Bank will take charge of supervising banks from Helsinki to Lisbon in November after subjecting their books to unprecedented scrutiny.

The aim is to restore confidence in the euro zone's banks, battered by the 2007-8 global financial crisis and the currency area's own debt crisis, and help revive lending to businesses and households, especially in stricken southern Europe.

Many economists say Europe is at least five years behind the United States in cleaning up its banks, which explains in part why the euro zone's economic recovery is so slow and fragile.

But it is not clear that the ECB exercise, involving a rigorous review of 131 banks' assets and liabilities and a tough test of their ability to withstand economic shocks, will be sufficient to get more credit flowing into the «real economy».

The problem lies less in any design fault in the process, which analysts agree is more demanding and transparent than two previous rounds of softball stress tests in 2010 and 2011 conducted under the aegis of the European Banking Authority.

The issue is more whether credit to firms in Italy, Spain, Portugal and Greece is scarce and expensive because shaky banks there cannot borrow and are reluctant to lend, or because of a shortage of demand in stagnant economies.

Where there is credit demand, banks scarred by the damage that bad lending can do may be too scared to lend to all but the safest of companies.

There is also concern about whether politics will get in the way of the ECB's drive to restructure or wind down «zombie» banks and reverse financial fragmentation in Europe.

Daniele Nouy, the French...