Banking Union Is an Idea in Search of the Good
It wouldn’t be Europe if a proposal didn’t lead to numerous interpretations.
A case in point is the concept of a so-called banking union, which is clearly intended as a way to achieve mutualization of the euro area’s debt and help solve the region’s crisis. “Easier than euro bonds; less obvious because it is more complicated” was how some saw it. But the potential weakness of mutualization was spotted and now we are mired in the maneuvers to extract something decent from the proposal.
The world learned a crucial lesson from the financial crisis: that supervision must consider both bank-level and economywide effects. The new European supervisory architecture, including the European Systemic Risk Board and the European Banking Authority in London, seeks to do this by ensuring Europe’s rules are consistent and applied equally across all member states.
Because taxpayers pick up the tab for mistakes and crises in their own country, supervision and the resolution of failing banks has always rested with individual member states. Now it has been shown that some euro-area countries can’t afford the bill and have few options -- such as the ability to print money -- for standing behind their banking system. The ensuing turmoil has led to the conclusion that bank supervision, not just rule making, must take account of monetary policy; hence the need for a banking union, especially for the euro area.
How do we blend these ingredients to maximum benefit and to avoid a banking union becoming a vehicle that undermines the single market in financial services?
The European Banking Authority as an agency of the European Commission operates only on delegated power, limiting its ability to make the tough decisions needed of a full-fledged supervisor. The commission also retains oversight of all its European agencies. By putting the European Banking Authority in charge of banking oversight, power will be concentrated in the commission, creating conflicts of interest similar to those when individual governments act as bank supervisors. Moreover, substantially expanding the power of the European Banking Authority could require time-consuming changes to the European Union Treaty.
By contrast, the treaty already has provisions for the European Central Bank to act as a supervisor, and this links monetary policy and supervision for the euro area. By extension, this would require a corresponding role for central banks in member nations outside the euro area, such as the Bank of England, to take account of monetary policy in their countries.
This isn’t a question of a level playing field because even euro-area countries will have supervisory variations in capital requirements legislation, contributing to local correction of issues such as the Spanish and Irish property bubbles.
However, EU-wide coordination will still be needed, requiring an ongoing role for the banking authority as rule maker, controlling supervisory variations for all 27 EU countries and continuing in its dispute-mediation role. This is even more the case if ECB supervision is only for large banks.
There are U.S. parallels here: supervision at the state level, but federal oversight for large banks or those requiring resolution after failing. Current EU capital requirements legislation fits this model. Member states have a role on taking economywide measures, balanced with EU-level constraints via the Systemic Risk Board or the commission.
A banking union also envisages mutualization of bank recapitalizations and deposit-insurance programs. But this wouldn’t happen for some time because budgetary controls have to prove themselves first, and mutualization without full integration would pose too much exposure to sovereign debt. Mutualizing bank debt is an even greater drag on member states’ balance sheets than sovereign debt. Changing creditor hierarchies so insured depositors are at the top of the queue if banks fail would help reduce the fiscal risks. Germany may want to exempt all but its biggest banks from contributing, too.
We would be left with national deposit guarantee programs standing as a common reinsurer or lender. The theory is that, collectively, these funds would be big enough to stop bank runs. That’s a worthy objective, but not of immediate use with most deposit-insurance programs depleted and banks short of capital. A euro-area bailout fund could provide a backstop for euro-area banks, but it requires approval in all euro-area parliaments, which would take time.
The U.K. probably wouldn’t join a sovereign-linked backstop. However, I strongly advocate keeping the door open to suitably structured and longer-term collective industry backstops, providing there is a genuine single market in financial services.
Although the mutualization of banking backstops looks challenging, the supervisory aspects are doable now, and may be useful. Difficult questions can’t be fudged. Parliaments and governments must study the pooling of sovereignty. And euro-area countries will need to abandon protectionist tendencies in financial services. Nothing here provides any basis for discrimination in the single market for financial services on the grounds of location. Quite the opposite.
The treaty provisions requiring all member states to act in accordance with the principles of the single market and free competition must be embedded at all stages, whether it is future treaty changes, the operation of EU economic governance or any future legislation building a banking union.
(Sharon Bowles is chairwoman of the European Parliament’s economic and monetary affairs committee. The opinions expressed are her own.)
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