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When Lehman Brothers Holdings collapsed, European officials reacted with barely concealed outrage at their American counterparts. By letting the investment bank go bust, they contended, the U.S. threatened to unleash a contagion that could crash the global economy. "For the equilibrium of the world financial system, this was a genuine error," Christine Lagarde, then the French Finance minister, said at the time.

Today, Europeans have no one to blame but themselves for their problems. Although the crisis had its origins in the U.S. banking system, the fallout has been far greater in Europe, where the region's undercapitalized banks buckled badly and are still far from healthy. Ireland's banking failures virtually bankrupted the state; Spain needed a  €100 billion ($133 billion) bailout to prop up its cajas, or savings banks, after an epic property collapse; two of the U.K.'s Big Four banks remain nationalized; and even the region's healthier banks are still held hostage by the euro area's debt crisis. Five years after Lehman it's the European banking system that poses arguably the greatest risk to global financial stability. (See also " Ireland's Banks Take the First Step on Long Road to Recovery")

Deutsche Bank's Jain (top) and Barclays'
Jenkins are raising capital. (Photographs by
Munshi Ahmed/Bloomberg, top, and Matthew

The threat reflects the sheer scale of the European system. Unlike the U.S., the region's economies rely much more on bank lending than on the capital markets to finance activity. Banking assets stand at a massive "35 trillion, or 3.3 times the European Union's gross domestic product, according to European Central Bank data. By contrast, U.S. banking assets amounted to $14.4 trillion, or 87.2 percent of GDP, at the end of March, according to the Federal Deposit Insurance Corp. Although European banks have taken some steps to shrink their balance sheets and raise capital, those actions fall well short of what's needed — and pale in comparison with the strides that U.S. banks have made toward rebuilding.

"Too much emphasis has been placed on the hope of the European economy recovering and not enough on banks' tackling their individual problems," says Sergio Ermotti, chief executive officer of UBS, which has taken some of the most drastic action to downsize, to meet Switzerland's rigorous regulatory standards.

Banks in Europe have reduced their balance sheets by a total of  €2.4 trillion since 2011. They have been slower to raise capital, although recent moves by Barclays and Deutsche Bank — which raised  £5.8 billion ($9.1 billion) and  €2.96 billion, respectively, with share issues — suggest that more banks may begin to move on this front.