While Rome burns
Source: www.economist.co.uk
Sep 25th, 2008 (Adapted)
American plans to buy up assets that are clogging the financial system lack detail but no one doubts that a massive government intervention is coming. In Europe jittery investors have no such reassurance. European governments have yet to respond publicly to calls from Hank Paulson, the treasury secretary, to follow his lead. They look set to keep faith with the approach that they have used to handle the crisis so far − staving off liquidity worries by allowing banks to use facilities at central banks to swap their assets in exchange for ready cash.
That makes many watchers nervous. The crisis in America has dramatically grown from one of liquidity to one of solvency as well. Lehman Brothers had access to the Federal Reserve's discount window, after all, but still went under. The burning question now is whether banks have enough capital. On some measures, European banks look pretty well capitalized. The average tier-one ratio, which measures capital based on the riskiness of bank assets, stood at 8% in the first half of the year. That looks solid enough, if you assume that banks have a good handle on risk.
