Europe Vows $2 Trillion Backing For Banks

Enlarge Khue Pham for NPR

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

Khue Pham for NPR

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

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.