The Man Who’ll Do Triage on Europe’s Banks

Benjamin Kilb for The New York Times

"You have to supervise what banks do," said Ignazio Angeloni, a top official at the European Central Bank.

FRANKFURT â€" All Ignazio Angeloni has to do is figure out Europe’s banking system.

Mr. Angeloni, 59, heads the European Central Bank’s financial stability division, giving him a lead role in a task about to begin: examining the books of the 130 or so largest banks in the 17 members of the European Union who use the euro. It will be financial triage aimed at determining which banks are sound and which are not.

Good luck with that.

Over the last few years, the world’s financial institutions have become black boxes, so opaquely complex that they are little understood by regulators or their own executives. Lehman Brothers vanished in a puff of financial wizardry gone wrong. JPMorgan Chase was humbled when it lost control of its own traders in London. And European regulators gave the French-Belgian banking giant Dexia a clean bill of health in 2011 after a supposed “stress test,” only to see it collapse subsequently.

This week, Mr. Angeloni and other central bankers are expected to announce new details of the review process. The undertaking, at the behest of the European Union, is meant to place the big banks of Europe more directly under the supervision of the European Central Bank, instead of the current patchwork of national regulators.

At stake is the world’s confidence in Europe’s banking system. If the effort fails, it could undermine Europe’s fragile economic recovery and the credibility of the European unity project.

“You have to supervise what banks do,” Mr. Angeloni said, during a recent interview at the central bank’s headquarters here. “You cannot leave them alone, because if you do, they can become dangerous.”

The banks of Europe, of course, are particularly treacherous. The ones in Greece were crippled by their government’s toxic debt. Those in Cyprus were “bailed in” by their own depositors. Spain’s have sucked in billions of euros in aid to make up for bad loans. And several banks across Europe have become wards of the state.

So can anyone really make sense of it all?

“Nothing will be perfect, right?” Mr. Angeloni said. “There will be mistakes, there will be things that are not uncovered fully. The goal is to make as much progress as possible.”

James Chappell, a banking analyst at Berenberg, called the banking review exercise “incredibly important.”

“Ultimately, for a banking union you need to have a credible supervisor, and investors want to have trust in banks’ balance sheets, and that’s what’s been lacking and continues to lack now,” Mr. Chappell said. “What the market has to believe is that the process has been credible.”

From the window of Mr. Angeloni’s downtown office, the future headquarters of the European Central Bank can be seen rising on Frankfurt’s horizon. The grand skyscraper, bracketed by cranes, is a testament to the central bank’s growing role as a world power.

The unwieldiness of some banks is a symptom of technological advances that have led to nano-speed trading and the use of complex computer algorithms that guide investment decisions, Mr. Angeloni said. While he expressed doubts about the usefulness of splitting the investment and retail arms of banks, as many on both sides of the Atlantic have advocated, he still suggested that some banks had grown too complex for their own good, or for society’s. Perhaps ominously for the banks, the silver-colored cuff links on his monogrammed shirt were shaped like bears.

“The C.E.O.’s, they look superhuman, but, in fact, very often they don’t know what’s going on, and they don’t understand because it is very, very complicated,” Mr. Angeloni said.

“The algorithms that govern the movements of asset prices are very difficult to understand for any C.E.O.,” he added. “In the end, the C.E.O., the people at the top, have to concentrate on the politics, right? If you are in that mind frame, it’s very difficult to concentrate on the nitty-gritty technical details. So there is a growing gap between the people who work at the bottom and understand the little things, and the people on the top.”

A version of this article appears in print on October 21, 2013, on page B1 of the New York edition with the headline: The Man Who’ll Do Triage on Europe’s Banks.