Europe Vows $2 Trillion Backing For Banks

The Frankfurt Stock Exchange (pictured) soared a day after Europe unveiled a bank rescue plan. i i

The Frankfurt Stock Exchange (pictured) soared on Oct. 13, a day after Europe unveiled a $2 trillion bank rescue plan. Khue Pham for NPR hide caption

itoggle caption Khue Pham for NPR
The Frankfurt Stock Exchange (pictured) soared a day after Europe unveiled a bank rescue plan.

The Frankfurt Stock Exchange (pictured) soared on Oct. 13, a day after Europe unveiled a $2 trillion bank rescue plan.

Khue Pham for NPR

European governments have promised nearly $2 trillion of support for the banking system in Europe.

After the British announcement of massive intervention last week, governments using the euro announced similar measures when they met in Paris Sunday night.

In announcing the German portion of the bailout plan on Monday, Chancellor Angela Merkel said it was all about creating "confidence."

The European plan zeroes in on one aspect of the financial crisis: Banks with extra cash are unwilling to loan it to banks that are short of cash. Under normal circumstances, such interbank lending goes on constantly; it's a foundation of the credit market. In recent weeks, however, interbank lending has come to a screeching halt.

The banks are suddenly aware of what economists call "counterparty risk," the risk that the banks to which they might lend money might turn out to be in bad shape and unable to repay.

The European idea is to get around that lack of trust by promising banks that loans they make to other banks will now be guaranteed by the governments.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.