The first step toward a solution is to recognise that you have lost control of the problem.
In that spirit, the Committee of European Banking Supervisors' report on bank stresses is welcome. But as attempts at clearing the air go, the exercise is a failure and will go down as a missed opportunity.
The committee said the overall objective was to assess "the resilience of the EU banking system to possible adverse economic developments and to assess the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks".
But wading through the report reminded me of being a child at a family gathering at which your "funny" uncle attempts to convince you that he can make a coin disappear by passing it from one hand to the other. In this case, it is bad debt that is passed between banks and sovereigns. Hence the attempt to argue that Europe's banks are largely safe as long as there isn't a sovereign default makes as much sense as saying a watch is waterproof as long as it doesn't get wet.
Destroying risk
In reality, a sovereign default and a banking crisis represent two sides of the same coin, an excess level of debt in the system. Financial risk might be subject to the laws of physics - total energy (or risk) is a constant. Or put another way, financial risk can't be destroyed by simply moving it from one balance sheet to another.
The underlying crisis remains the same. It is still all about the solvency of the banking system, and it remains unresolved. Europe is just the latest staging post.
By the same token, the idea that the European Financial Stability Facility and the European Central Bank's U-turn on direct purchases of government bonds was anything other than a bank bailout is much mistaken. The EFSF is merely the latest in a line of state-financed bank bailouts. The question is, will it be enough?
Lot of debt
The bad news is that euro-area lenders still have an awful lot of debt to roll over in the next three years. International Monetary Fund data suggest that commercial euro-area banks may need to roll over more than 2 trillion euros (Dh9.58 trillion) of debt by the end of 2013.
And the biggest failing of the stress test is that it has not really helped investors to distinguish between good and bad banks in relation to that threat. In the end, the financial crisis will be resolved when either asset prices recover fully and/or bad debts are properly written off.
Past experience suggests this process will be long and drawn out, though hopefully not as long as it has been in Japan. In the meantime, investors are left to rely on their own wits to decide which banking systems and banks are the safest. But if we have learned anything since 2008, it is that when investors know there is a debt load, but not precisely who owns it, all banks quickly come to be seen as part of the problem. The sooner Europe realises this, the safer we will all be.
