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Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.

Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.

Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator

Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time

More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).

He dryly notes that Germany couldn’t even force its own savings banks to join its national deposit-insurance scheme.

Each country in the euro has its own bankruptcy code

Putting the European Central Bank (ECB) in charge of the region’s biggest banks should end the cosy relationship between banks and regulators that allowed Irish and Spanish banks to keep lending during property bubbles and the likes of Deutsche Bank to run with so little capital. If the ECB proves itself an effective supervisor

without ready access to a pot of money to fill these holes, the ECB could be reluctant to force banks to come clean. “It is madness to expose capital shortfalls if you don’t know where new capital is going to come from,” says one bank supervisor.

“If you wanted to challenge a decision, where would you go to court?” asks the head of a European bank regulator.

Economic (and political) logic requires that the eurozone will soon also need a common bank rescue fund. Officially, this has not yet been acknowledged. But that is often the way that European integration proceeds: an incomplete step in one area later requires further steps in related areas.

The new agreement suggests that in the future, banks will be bailed out by the collective effort of Eurozone countries.

First, this arrangement is to be finalised by the end of the year. This means that, in the end, the Spanish debt will rise by €100 billion (the market participants who enthusiastically celebrated the decision by raising the price of Spanish bonds will eventually understand that). Ditto in the not unlikely case that some Italian or French banks wobble before December.

Third, the arrangement is linked to the establishment of a “single supervisory mechanism involving the ECB”. This could be a single Eurozone supervisor built inside the ECB, which would go a long way to plugging one the worst mistakes in the Maastricht Treaty (lack of a joint regulation and resolution regime for banks).

This is important because a contagious banking crisis that hits several large banks would require much more money than is available in the EFSF-EMS facilities.

Light conditionality, as they requested, is bound to collapse at the foot of the Bundestag, which must approve every single loan.

There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries.

They were in charge of the regulatory leniency that permitted the banks in their jurisdictions to engage in lender forbearance (extend and pretend/delay and pray) and to overstate the fair value of their assets.

To avoid the cyclical stagnation in the eurozone turning into secular stagnation, four policies are required.

The second measure is a temporary fiscal stimulus (say 1 per cent of eurozone GDP per year for two years, concentrated in the countries with the largest output gaps, that is, in the periphery), which is permanently funded and monetised by the ECB.

this will be a reminder that the most important asset of central banks – the present value of future seigniorage profits – is off-balance sheet.

Finally, to achieve debt sustainability for the eurozone sovereigns, radical supply side reforms are required that boost the growth rate of potential output to at least 1.5 per cent in Italy, Portugal and other sclerotic countries.