A European banking union is no fix for the region’s lenders, trading at a fraction of the book value of their assets, without closer fiscal integration and a solution to the sovereign debt crisis, investors say.
Policy makers will discuss ways to coordinate bank oversight, bring together national deposit guarantees and combine crisis management powers at a summit in Brussels today and tomorrow in an effort to bolster confidence in the region’s lenders. For a banking union to succeed, investors say, Europe must achieve for lenders what it’s failed to accomplish for governments: shared liabilities.
“Talk about a banking union is too premature,” said Guy de Blonay, a London-based fund manager at Jupiter Fund Management Plc, which oversees about $37.5 billion. “Europe hasn’t taken steps to restoring an orderly sovereign debt market. You need economies to borrow at a decent rate.”
Lenders in Europe, burdened by $1.2 trillion of holdings in Spanish, Portuguese, Italian and Irish government bonds, face rising bad loans as the single-currency region teeters on the brink of recession. Governments’ struggles to repay their debt as economies contract is adding to skepticism they can support ailing lenders. Germany’s opposition to sharing government and bank liabilities is raising concern a banking union will become another blunt tool in efforts to tame the crisis.
The Bloomberg Europe Banks and Financial Services Index, which tracks 43 of the region’s lenders, has dropped 20 percent since March 19, its high for the year. Banks most exposed to the sovereign debt crisis, such as Italy’s UniCredit SpA and Intesa Sanpaolo SpA, trade at no more than 0.3 times their book values, data compiled by Bloomberg show, indicating investors are pricing in their failures.
Italian banks boosted holdings of the nation’s government bonds by about 85 billion euros ($106 billion) this year to 295 billion euros, or about 18 percent of the country’s outstanding bills and bonds.
Michel Barnier, the 27-nation bloc’s financial-services chief, has proposed setting up a network of national bank-financed funds to stabilize lenders. They would also be expected to pool funds to tackle the failure of a large cross-border bank. Barnier also wants national deposit guarantee programs merged into a pan-European fund to stem deposit outflows.
Policy makers want to prevent the deposit flight that hit Greek banks from spreading. Greek deposits fell 30 percent since the nation triggered the region-wide sovereign debt crisis in 2009, central bank data show, leaving lenders reliant on European Central Bank lending to fund themselves.
The goal of a European deposit guarantee program would be to convince savers their money is safe regardless of the solvency of their domestic government. That would, in turn, help secure banks’ access to one of the cheapest sources of long-term funding and prevent bank runs across the periphery.
Still, while individual banks, central banks and governments could be called on to fund a joint guarantee plan, only a “full back-up from the ECB would make a EU insurance scheme credible,” Mediobanca SpA analysts Antonio Guglielmi and Alain Tchibozo wrote in a note to clients on June 25.
“The question around a banking union is are the funds there to make good on the promises?” said Daniel Zuberbuehler, former vice chairman of the Swiss Financial Market Supervisory Authority and now a financial-services consultant at KPMG LLP in Zurich. “It’s an issue of credibility. Who pays and is the system capable of footing the bill?”
A banking union “only makes sense if you have a paymaster agreement,” Zuberbuehler said. “Only after you have a fiscal union and more harmonization in Europe does it work.”
European Union President Herman Van Rompuy has proposed that coordinated banking supervisory powers could be taken on by the Frankfurt-based ECB. The central bank could be given the powers under existing treaties and may serve as an umbrella over national regulators, he said.
Policy makers would need to decide which banks would fall under the central regulator’s remit, a decision that may determine its success, say investors. Restricting supervision to the largest, systemically important banks would ignore the threat posed by smaller lenders.
“As the recent troubles in Spain and Ireland have demonstrated, smaller or medium-sized banks can be the driver of a lot of problems,” Ronit Ghose, a Citigroup Inc. analyst in London, wrote in a June 15 note.
U.K. Chancellor of the Exchequer George Osborne told BBC Radio 4 on June 7 that Britain won’t be part of any banking union in the euro area and that he will seek safeguards that ensure the single market operates throughout the European Union.
“From a global perspective, if a banking union were to be limited to the euro zone, without the U.K., it would be a parochial aspiration,” said KPMG’s Zuberbuehler.
Today’s summit, the 19th since Greece’s financial meltdown rattled the euro, is trying to resolve competing visions over how to reshape the 17-nation economy, with Germany and its fiscally disciplined neighbors unwilling to burden their taxpayers.
German Chancellor Angela Merkel on June 25 hardened her resistance to euro-area debt sharing, including deposit insurance, to resolve the region’s crisis. Merkel dismissed “euro bonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive,” saying that they ran against the German constitution. She told German lawmakers in Berlin on June 26 she expects there to be no shared debt liability in her lifetime.
Without a simultaneous fiscal union, any banking union may not be enough to stem the “balkanization of banking markets” arising from funding stress and “financial protectionism,” Huw Van Steenis, a Morgan Stanley analyst, wrote in a note to clients June 26.
“Setting up a banking union will take time as it requires a lot of rule changing, new laws and the hiring of people where the regulator would sit,” said Patrick Lemmens, who helps oversee about 13 billion euros at Robeco Groep NV in Rotterdam. “But the plan to have such a banking union, together with a plan for more united Europe with clear fiscal discipline and ultimately the issuance of euro bonds would be steps which need to be announced in the short term.”
What’s more, the banking proposals don’t address the immediate crisis in Europe, which has pushed Spanish bond yields to record highs and left the region’s banks on life support from the ECB, said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.
“For banks in France and periphery Europe to become investable again requires a solution to the sovereign debt crisis,” Bodereau said in a telephone interview. “It would be nice to have better regulated, better capitalized banks, but ultimately you need to stabilize the government bond markets of Spain and Italy.”
That solution must involve the ECB reinstating sovereign bond purchases on a large enough scale to immediately contain government borrowing costs, he said.
“Temporarily, a banking union plan might be good news for lenders,” said Paul Vrouwes, who helps oversee about 3.3 billion euros in global financial stocks at ING Investment Management in The Hague. “But I worry about debt levels and decreasing economic growth. Central supervision doesn’t bring light at the end of the tunnel.”