Opinion

Hugo Dixon

Euro banking union won’t come fast

By Hugo Dixon
June 18, 2012

Some European policymakers are talking about a “banking union” for the euro zone as if it was around the corner. Jose Manuel Barroso, the European Commission president, for example, told the Financial Times last week that such a union – which would involve euro-wide supervision, bailouts and deposit insurance for the banking industry – could be achieved next year.

But this is not remotely likely. Parts of the zone’s banking industry are so rotten that taxpayers elsewhere can’t reasonably be asked to bear the burden of bailing them out. A massive cleanup is required first. The crisis in Greece, Spain and other countries may provide the impetus. But even then, as Germany suggests, banking union should proceed in stages.

The appeal of a euro zone banking union is understandable. Governments and lenders are currently roped together in what has been dubbed the sovereign-bank doom loop. Weak banks – for example those in Spain, Ireland and Cyprus – can drag down their governments when they need a bailout. Equally, weak governments, such as Greece’s, can drag down their banks when those are stuffed with their own sovereigns’ bonds. By shifting responsibility for bailouts to the euro zone as a whole, the loop could be cut. Or, at least, that is the hope.

The snag is that banks and their governments are entangled in a tight incestuous relationship. Some of Spain’s cajas, for example, made dubious loans to their directors, as well as financing politicians’ pet projects. And the ex-chairman of Bankia, which has required the mother of all bailouts, was a former finance minister. Conflicts of interest have also been rife in Ireland, Cyprus and Greece. Even supposedly virtuous Germany has suffered from incompetent Landesbanken, controlled by regional governments, whose boards are filled with political appointees.

Bank boards were often useless or worse. But the national supervisors who should have spotted the problems were not much better. And Europe’s initial attempts at cross-border banking supervision have been pathetic. A European-wide stress test in 2010 didn’t even bother to examine Anglo Irish, a cesspit of bad property loans which virtually bankrupted Dublin. Another test in July 2011 concluded that Spain’s banks were only 1.6 billion euros short of capital. Then another last October bumped the number up to 26 billion euros – but didn’t stress the lenders’ property loans. Finally, last weekend’s bailout came up with a hopefully more realistic figure: up to 100 billion euros.

Governments have given the European Banking Authority (EBA) inadequate authority to overrule national supervisors. Meanwhile, the domestic authorities always have an incentive to downplay the capital needs of their banks. So long as lenders are pronounced solvent, they can get liquidity from the European Central Bank. That way, governments can delay putting in any of their own money to bail out their domestic lenders.

Part of the “doom loop” involves banks stocking up on sovereign debt. That link has grown tighter in Italy and Spain in recent months as foreigners have stopped buying bonds, leaving domestic lenders to step into the breach. They got the money from the ECB. If governments really surrendered control of their banks to a tough supranational agency, it would be harder to engineer such a money-go-round.

Yet another problem is that governments are reluctant to inflict losses on bondholders. In Bankia’s case, there were an estimated 12 billion euros of subordinated debt and 8 billion euros of senior debt – or 20 billion euros in total. These have not suffered losses as part of the bailout. But unless there are haircuts for a bank’s own bondholders, is it reasonable to ask the taxpayers of a foreign country to fork out cash to bail out banks and their depositors?

All this means that for banking union to work effectively, there needs to be effective supervision as well as a system to bail in bondholders. Everyone agrees on this. The real debate is largely one of timing. The peripheral countries want a euro-wide system of bailouts and deposit insurance fast, as an answer to the current crisis. Germany is stressing the need to start with supervision.

Berlin is right that the clean-up has to come first. That may, of course, be accelerated by the crisis. Spain’s banking bailout gives the rest of the euro zone a golden opportunity to insist that its system of crony finance is swept away. The same goes for Cyprus, a haven for recycling dubious money from Russia and elsewhere, if it requires a bailout.

But the euro zone will also need to determine who will supervise banks. The EBA is a busted flush. So it would be best way to empower an institution that has credibility. The obvious candidate is the ECB – an idea Germany’s Angela Merkel backed last week. But even that could be problematic: giving the ECB responsibility for supervision as well as monetary policy would concentrate a huge amount of power in a single body. Even it might struggle to monitor banks over such a vast area.

Then, of course, a system for bailing in bondholders needs to be crafted. Although the European Commission this month proposed a plan, it is not supposed to kick in until 2018. Finally, there is the question of how governments in trouble will finance their debts if they can no longer lean on their banks. Nobody yet has a good answer to this.

The banking union train may be about to leave the station. But it will take years to reach its destination.

Comments
2 comments so far | RSS Comments RSS

All of what you say is true, but what you leave out is more important.

(1) First and foremost, the eurozone is NOT simply another USA, just waiting for the right shove to make it into a US of Europe.

Anyone with a knowledge of European history will know a banking union will not work in Europe because the sociopolitical environment that divides the Europeans is truly MASSIVE compared to the US.

And when you consider the history of the US attempt to cobble together a “real” US of America — it has been a total failure for everyone but the wealthy class in case you don’t know that — the whole idea suddenly becomes ludicrous in the extreme.

(2) To have a functioning economic union such as you describe, there has to be an effective enforcement mechanism. Simply setting up yet more rules and regulations without any means of enforcement will NOT solve ANY of the present problems in the eurozone banking system.

It is no different than setting up a constitution to govern a country, but then not allow for a police force or army to enforce what you have set up.

The idea of simply taking a country to court to enforce regulations for a new US of Europe is stupid beyond belief. Do you people have any idea of what human nature is really like? This “solution” being proposed will solve NOTHING. All it will do is to buy some time (maybe) until the next financial crisis or disaster.

The problem is the wealthy class doesn’t understand anything except the monetary reasons why this should happen. And the monetary reasons always seem to benefit the wealthy class at the expense of those they want to “save”. Isn’t that a strange coincidence?

The classic example — the “poster child” of arrogance and stupidity of one who is determined to interfere where it doesn’t belong — of this type of economic foreign policy and the disasters it generates is the US geopolitical policy.

Total failure to understand the “local culture” and what is important to them continues to doom US foreign policy — and even more incredibly, we NEVER learn from our mistakes.

I see no discernible difference between that and what the global wealthy class is attempting to do.

That is why the reality of a US of Europe will never occur, or if it does, it will have as many fatal flaws as the original agreement, with an even shorter life span.

Nothing you have done thusfar has done any good.

In fact, it has only succeeded in making the eurozone far worse because you are burdening it will debt that can NEVER be repaid.

Due to the ever-increasing amounts of debt to the wealthy class, real growth CANNOT occur.

What you are doing is preventing any kind of recovery, thus bringing on the disaster you are supposedly hoping to avoid.

Apparently, none of you is capable from learning from your mistakes either.

Unfortunately, the wealthy class rarely has to suffer the consequences of what they have done, so there is no incentive to learn — especially when everyone else has to suffer for their greed.

This is NOT just my opinion. History tells us, or should if we had any sense, that I am right and you are wrong.

It is far better the global economy crash now, before more damage is inflicted by meddling in what you clearly do not understand.

Posted by Gordon2352 | Report as abusive
 

Re: Greece, Italy and Spain. A lot of voters in Germany and much or Europe even in the USA do not understand: When you loan people more money than they can pay, unless you have something like slavery, you do not get paid. You give them the service or object if give the money someone may take it. The holders of Greek, Italian and Spanish debt should eat it. If that causes a banking problem some banks should be nationalized to make business loans to those who can pay.

There are in most bankruptcy courts in most Western nations that limit payments to that income above necessities.

But every one would feel better if there Europe wide court system for bankers and Politicians who commit fraud. So far few if any politicians or bankers got jail in the USA for the sub-prime crash.

Posted by SamuelReich | Report as abusive
 

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