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What Banking Union?

October 1, 2012

Published in ‘New Europe,’ 30 Sept – 6 Oct 2012, page 5

What Banking UnionFollowing the 2008 crisis, financial markets have seen an avalanche of regulation, translating governments’ will to prevent future market meltdowns, but also to make good for their lack of intervention in the markets, these last ten years. Sometimes, these regulations are so complicated that it becomes practically impossible to implement. A typical example is the so-called ‘Volcker Rule’ in the US, named after the former chairman of the Fed and currently personal adviser to President Obama; (incidentally, Paul Volcker himself, considers it impossible to apply his ‘Rule’ without the close cooperation of the banks which the Rule is supposed to regulate). All this comes in addition to the numerous texts imposed by the Financial Action Task Force (FATF) regarding money laundering and anti-corruption safeguards, Basel II and III provisions about bank capital adequacy, the numerous European Banking Directives and Regulations, and finally the infinite amount of texts emanating from the local central banks.

All the above points lead us to one conclusion: we live in an increasingly over-regulated world, where on the one hand political leaders tend to impose their grip over the markets in order to reassure their voters, and on the other hand eager bureaucrats amplify political will and transform it into complex and obscure legislation, as this is a method to enhance their power within the system. The question here is whether this overproduction of text is worth its money, that is, if we are more protected now than we were three or four years ago. The recent banking scandals, such as the ‘Libor affair’ or the JP Morgan Chase’s losses would tend to support the opposite.

In this international context, the Eurozone’s problems, first with sovereign debt, and then with the banking liquidity and solvency issues, came naturally to exacerbate the trend for more regulation. Regulation was promoted from a purely technical level to become a central political issue of the European Union. Thus, after the fiasco of the ‘Fiscal Union’ project, i.e. the harmonization of taxation and public spending throughout the EU, too difficult to materialize at present time (Chancellor Merkel said “not during my life”), the Brussels bureaucrats’ new baby is the ‘Banking Union.’ The concept is to put all (?) banks operating within the EU under a unified supervision of a supra-national body, probably the European Central Bank (?), in order to prevent future debacles like the one taking place in Spain, that constitute a threat to the EU as a whole. The idea looks reasonable, but several questions must be addressed and clarified before it can become operational.

All the banks?  We’re just at the very beginning of the project and there are already two conflicting views. The French want supervision over all 6,000 banks operating within the EU, while the Germans wish to only concentrate on the 30 to 50 ‘too-large-to-fail’ institutions, those that present ‘systemic risk.’ Of course, there are politics behind each approach, but the key point is to decide what will be the exact object of supervision.

Who will supervise? The most ‘natural’ candidate seems to be the European Central Bank (ECB), while immediately raising the question of the availability of its resources. The ECB is currently pretty busy stabilizing the sovereign debt markets and providing emergency liquidity to troubled banks and countries. The ‘supervision’ function has been assigned to central banks of each member-state, which have knowledge of local markets, jurisdictions, and the people. Whether the local banks do their work properly is a different question (especially when one looks at Spain), but this does not in any way guarantee that the ECB will do a better job. It goes beyond saying that should the French approach prevail, the ECB dramatically lacks the resources to look after thousands of banking institutions throughout the whole of Europe.

What about the ‘resolution’ authority and the bank deposits guarantee? Supervision is a void matter without the authority to decide when to put a bank into liquidation, to separate the resulting ‘bad bank’ from the healthy assets to put for sale, and to take tough decisions about the compensation of depositors and bondholders. We are here in the proposal’s most uncharted territory, as tricky trade-offs regarding national sovereignty are to be negotiated and decided.

Finally, are we talking about the Eurozone or the European Union in its entirety? Neither is this point clear at present. Common sense would suggest that the ECB would take care of the Eurozone banks only; but what would happen if a large bank outside the area collapsed? Doesn’t this represent systemic risk to the euro area banks through credit lines and correspondent banking activity? Which leads us to the horny issue of how supervision can work in currencies other than the euro; will, for instance, ECB provide the necessary billions of pounds to save a British bank in distress?

These are only a few of the crucial issues raised by the Banking Union’s proposal, but failing to address them properly might once again confirm Mrs. Merkel’s view – not during our lives.

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