Taking the union out of banking union?

November 15, 2013

Today’s meeting of EU finance ministers will grapple with banking union and next year’s stress tests though with no German government in place, a leap forward is unlikely.

One German official seemed pretty clear yesterday, saying: “We don’t want a mutualisation of bank risks.” That, some would argue, takes the union out of banking union and is certainly a very different approach to the one promised last year when EU leaders were scrambling to keep the euro zone together.

Some experts argue that with the European Central Bank pledging to support euro zone governments come what may, the urgency has been taken out of banking union and that next year’s health checks and cross-border supervision under the ECB is going far enough. Any holes in bank balance sheets can comfortably be filled by creditors and governments.

Others say that without a backstop fund underwritten by all euro zone member states as lenders of last resort, the currency bloc is in little better shape to withstand the next banking crisis, whenever that may come (history suggests it surely will). You certainly don’t hear any talk of a mutual deposit guarantee any more, which was billed as the third plank of banking union.

The decisions of Ireland and Spain to exit their respective sovereign and banking bailouts without seeking any financial backstop to ease the way denotes confidence in the near-term at least and it’s true that bond market pressure has been notable by its absence all year.

The ministers are still likely to pledge to stand by their banks if next year’s tests reveal they need to bolster their capital, according to a draft statement. But then it would be astonishing if they did not.

If the tests show a bank is short of capital, its shareholders, junior bondholders and other investors will be asked to stump up. But if they fall short, host governments will have to fill the gap. Few countries have any special funds for that, so the ministers have to make sure that at least all the necessary legislation is in place for them to be able to inject funds.

But it remains unclear whether, if all else fails, the euro zone’s rescue fund – the European Stability Mechanism – will be able to provide direct assistance to such banks, as originally promised, rather than by lending to their governments.

France says yes, Germany no. If the ESM will only lend to governments, then a banking failure will be added on to national debt.
Much further down the line, the plan is for a common resolution fund to be financed by the banks themselves but there is precious little detail about that.

There are other arguments bubbling under the surface too.

As we exclusively reported last weekend, Angela Merkel’s Conservatives and the centre-left Social Democrats have agreed as part of coalition negotiations that a key part of European banking union – a body to decide when to rescue or close failing banks — should be attached to the EU finance ministers group, not the European Commission.

Giving the Ecofin the right to rule on the fate of a struggling banks raises the risk of politicizing the issue and of splits within the council. That could give investors pause for thought.

The German plan has not yet been signed off by the people who really count in Berlin so Finance Minister Wolfgang Schaeuble won’t have a proposal to present. But it would be surprising if it wasn’t discussed at some level.

Meanwhile, the SPD meet in Leipzig for a party congress where leader Sigmar Gabriel will rally support for an impending coalition deal with Angela Merkel’s conservatives. He has to convince delegates who in turn must persuade grassroots supporters to approve the eventual accord in a vote.

As we reported this week, the coalition talks seem to be going in a sovereignist rather than integrationist direction as far as the EU is concerned. The SPD is keener on common euro zone structures than the CDU but is not making a big issue of it, focusing instead on domestic issues like a national minimum wage.

The European Commission will publish its opinion on the national budgets of 13 euro zone countries. Greece, Portugal, Ireland and Cyprus are not included because they  are in existing bailout programmes.

On Wednesday, the Commission launched an investigation into whether Germany’s persistently high current account surplus is unbalancing the European economy. The EU will recommend steps to fix the imbalance if the review, due to be finished early next year, finds the surplus is harmful. But that is not a foregone conclusion.

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