Losses that eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized.

By contrast, eurozone banks have almost stood still on both indicators.

Banks in the eurozone came under pressure, and interbank tensions increased.

So, what needs to be done? First, eurozone banks have to be recapitalized.

A Grexit would hit European banks that hold peripheral eurozone countries sovereign bonds.

Broad coverage All banks in the eurozone will be covered by the new European supervisory system.

Within the eurozone, for example, banks can extend loans to any government using exclusively borrowed money.

The choice of tasks to be entrusted to the ECB will ensure rigorous, high quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks and thus increasing financial stability throughout the eurozone.

Many eurozone banks have made far less progress in strengthening their capital adequacy and liquidity than have American and British banks since the financial crisis erupted.

German leaders must acknowledge that their country s banks are dangerously exposed to the debts of the eurozone periphery.

Eurozone banks became among the world s most over leveraged and the worst affected by the crash of 2008.

And, because eurozone banks hold a substantial part of their assets in the form of eurozone sovereign bonds, the sovereign debt crisis became a potential banking crisis, worsened by banks other losses, owing, for example, to the collapse of housing prices in Spain.

Indeed, sovereigns are dumping a larger fraction of their public debt onto banks balance sheet, especially in the eurozone.

Many banks in Serbia and other transition countries in Europe rely heavily on funding from their eurozone parent institutions.

PARIS European Union leaders concluded 2012 with a landmark agreement that places all eurozone banks under a single supervisor.

Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.

Appropriate use of official resources, including for recapitalization of eurozone banks, would be needed to limit collateral damage and contagion.

It might have gained more support just a few days later after senators witnessed the bailout of the giant eurozone banks.

If a gradual process of disintegration eventually makes a eurozone breakup unavoidable, the path chosen by Germany and the ECB large scale financing for the eurozone periphery would destroy the core central banks balance sheets.

Unfortunately, European banks do not have enough capital, irrespective of eurozone bailout efforts, because the damage will not be limited to Greece.

If eurozone growth wildly outperforms expectations in the next few years, banks balance sheets would strengthen and German taxpayers pockets would deepen.

In the first stage, beginning in the spring of 2008, the locus of the North Atlantic crisis moved from the United States to the eurozone. Banks in the eurozone came under pressure, and interbank tensions increased.

First, the banks and other financial institutions in Germany and France have large exposures to Greek government debt, both directly and through the credit that they have extended to Greek and other eurozone banks.

As investors reduce their exposure to the eurozone periphery s sovereigns, banks, and corporations, both flow and stock imbalances will need to be financed.

In Ireland, the three largest banks went crazy for commercial real estate financed by large scale borrowing from other eurozone countries (including Germany).

Eurozone member states then agreed to address their banking problems by creating a single supervisor and a mechanism for winding down bad banks.

At the same time, the best way to contain financial contagion would be to implement a pan European plan to recapitalize eurozone banks.

But, since the onset of the global financial crisis, eurozone based banks subsidiaries in emerging Europe have been reducing their exposure to the region.

But, in the second half of 2011, the eurozone based parent banks that dominate emerging Europe s banking sector came under renewed pressure to deleverage.

Regardless of what Greece does, eurozone banks now need to be rapidly recapitalized, which requires a new EU wide program of direct capital injections.

Moreover, it has provided loans to the banking sector, recently launching a three year refinancing operation that generated demand from eurozone banks for 489 billion.

In the eurozone, banks are vulnerable to sovereign debt crises because they hold a lot of government bonds frequently issued by their country of origin.

Third, to restore credit growth, eurozone banks and banking systems that are under capitalized should be strengthened with public financing in a European Union wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short term forbearance on capital and liquidity requirements.

How could a eurozone supervisor be based outside the eurozone?

That is why continuing uncertainty about the integrity of the eurozone, and the value of its members sovereign debt, is proving so damaging to its banks.

The ECB s Governing Council comprises the six members of the Executive Board plus the governors presidents of the 16 national central banks of the eurozone countries.

Commercial banks found it advantageous to accumulate weaker countries bonds to earn a few extra basis points, which caused interest rates to converge across the eurozone.

Even the periphery of the eurozone is benefiting from the wall of liquidity unleashed by the Fed, the Bank of Japan, and other major central banks.

Some 90 of the refinancing debt that the commercial banks of the GIPS countries (Greece, Ireland, Portugal, and Spain) hold with their respective national central banks served to purchase a net inflow of goods and assets from other eurozone countries.

Given their large, battered holdings of peripheral eurozone countries sovereign debt, many of Europe s thinly capitalized banks would be insolvent if their assets were marked to market.

Scotching the Eurozone

Demokratisasi di Eurozone

Optimizing the Eurozone

Poland s Eurozone Tests

Rebalancing the Eurozone