Current policies for dealing with the European banking crisis are likely to produce decades of economic underperformance as extended implementation periods prolong the spiraling sovereign debt crisis. While some proposals, such as centralized regulation, have potential to alleviate future crises, continuing stagnation will eventually end Europe's global leadership in banking. Avoiding this outcome can and must start now.

Resolving all the problems facing European banks will take years, but that's no reason to wait for a comprehensive solution or delay moving ahead. Rather, the path forward requires breaking down the challenge into manageable parts and addressing these in ways that generate progress and build momentum. Banks can work with government and commercial investors immediately to attract capital, strengthen balance sheets and comply with Basel III regulations. All this can be achieved without adding to sovereign debt burdens or fueling political controversies. The first step: create public-private partnerships designed to dispose of banks' costly noncore assets.

Across the continent, banks' balance sheets are a mess. The International Monetary Fund recently estimated European banks must dispose of €2 trillion in assets by the end of next year. So far, there is not much evidence of this happening. While commentary in the media has focused on the need to get rid of distressed assets, such assets are not the only ones causing distress. Disposing of noncore assets can be extremely helpful in the near term.

During the run-up to the financial crisis of 2008, many banks improved their margins by investing in higher-yielding noncore assets such as private equity funds, trade financing and infrastructure lending operations. These assets generated good returns, but come with risks that, since the financial crisis, have made regulators nervous. The assets are illiquid, for example, with long maturities. Under impending Basel III regulations, banks will be permitted to keep their noncore assets, but if they do, they will also have to meet higher thresholds for regulatory capital and liquidity. In effect, Basel III makes holding on to noncore assets prohibitively expensive.

While public accounting makes it difficult to perceive the extent of the problem, studying the asset maturity profiles of the biggest banks in the Eurozone provides a glimpse. The ten largest banks collectively hold €3.6 trillion of assets with maturities over five years, equivalent to 29% of their total assets and almost six times their combined equity. Of course, not all of this is noncore. However, even a fraction of this total remains a substantial sum that, dealt with effectively, could supply relief at a time when both regulatory capital and liquidity are scarce.

Unlike the "toxic" assets that caused so much misery in 2008, the noncore assets should be attractive to buyers such as foreign financial institutions, private equity or insurance funds and entrepreneurs with appropriate risk appetites and liability profiles. To transfer noncore assets, public-private partnership arrangements similar to those used during the financial crisis provide an effective solution. Each constituency stands to benefit. Governments transform themselves from safety nets into facilitators of a banking revival. Banks bolster their balance sheets without recourse either to the uphill challenge to raise capital or to politically sensitive reductions in lending activity. Private investors gain access to a pool of profitable assets providing attractive rates of return, with independent assurance of value and quality. It's a win-win-win.

In practice, banks, governments and potential investors would collaborate to identify noncore assets for sale. Governments would ensure independent valuation of all assets to be sold, and the assets would then be sold into a special purpose vehicle structured like Ireland's National Asset Management Agency, the vehicle used to remove toxic real estate loans from Irish banks in 2009.

This partnership would be capitalized with equity and debt, with investors receiving returns commensurate with their investment type and asset performance.  Private investors would provide equity, banks would provide rated, amortizing debt, while governments could provide either debt or equity. Hence, governments can choose whether to take on any of the risk (and upside) or the partnership, or whether to act merely as a facilitator while being paid for their trouble.

Meanwhile, every day that passes without substantive measures to help fix European banks prolongs the crisis. Due to already overstrained budgets, the nations comprising the European Monetary Authority cannot afford direct investment to prevent the collapse of their banks. Public-private partnerships offer a means to make forward progress on the path out of crisis. It is high time for government officials and banking executives to get moving.

David Chapman is a London-based analyst at Monitor Horizons, a unit of Monitor Group. He can be reached at david_chapman@monitor.com. Brian Koeller is a managing director at Pearl Street Capital Group in Boston. He can be reached at bkoeller@pearlcap.com.