The financial crisis in Europe: evolution, policy responses and lessons for the future

Purpose – The purpose of this paper is to provide an account of the financial crisis in Western Europe, primarily from a country-level and banking sector perspective, from 2007 to the spring of 2009. It aims to detail measures enacted by governments and central banks to deal with impaired bank assets, recapitalize or otherwise resolve troubled banks, and inject liquidity into the banking system. It also aims to examine reform proposals aimed at creating a more secure and stable financial system.

Design/methodology/approach – The paper draws on factual material and analysis that is presented in central bank reports, other banking sector surveys and reports, media reports, and analysis by leading academics and practitioners sourced from published articles and books, working papers and blogs.

Findings – Recent firefighting measures to purchase impaired assets, recapitalize troubled banks, and inject liquidity have commanded widespread support, despite moral hazard concerns surrounding publicly funded bank bailouts. However, the roadmap to recovery remains uncertain. There is concern that significant volumes of impaired assets have been retained on many Western European bank balance sheets. Under the regulatory framework that is being shaped in response to the crisis, banks are expected to become leaner, more strongly capitalized and less highly leveraged, and to develop improved risk management practices.

Originality/value – This paper is written for a broad audience to provide a descriptive summary of the financial crisis in Western Europe, a survey of the debate concerning the implications for bank regulation and an extensive bibliography that will serve as a valuable resource for banking academics and practitioners.