Backlash grows against EU banking union plan
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Backlash grows against EU banking union plan

Nordic central bank governors sound alarm over the role of non-euro states as policymakers rush to craft ambitious joint liability plan by year-end.

Sharp divisions over the creation of a European banking union– seen by some as a crisis circuit-breaker – were exposed after Denmark and Sweden expressed doubts about the plan. In interviews with Euromoney, the central bank governors from the Nordic states said greater clarity over the role of non-euro states in the joint liability plan was needed, while the end-year deadline was too ambitious. The Danish central bank governor Nils Bernstein  raised the stakes for European policymakers, saying failure to satisfy concerns of non-euro states threatened the regional union. In an interview with Euromoney, he said: "..we may need to ask whether it will be politically possible for us to be a part of this union if there is no equal treatment [between euro and non-euro states in the negotiation over the banking union project]."

On Tuesday, EU finance meetings took place to discuss the banking union drive, after EU leaders last month affirmed plans to place the European Central Bank (ECB) in charge of euro-area banks, with an end-December goal for political agreement on the supervisor’s design and powers.

The creation of a joint liability plan – an EU banking supervisor, a resolution fund and deposit insurance – was announced with much fanfare in June. The burden-sharing programme was touted as a means of breaking the negative sovereign-bank feedback loop, a way to prevent future crises and the climax to the creation of the single financial market.

However, the banking union drive, as proposed, confuses the short-term need to restructure troubled lenders with the medium-term objective of crafting a joint liability framework for eurozone states, said Stefan Ingves, Swedish central bank governor, and chairman of the Basel Committee on Banking Supervision.

He told Euromoney: “Hands-on bank restructuring does not in itself require a banking union. So the issue is, in the near-term, how do you set up a bad bank? You can for political reasons say you want to tie the issue of bank restructuring with the creation of a banking union. However, in terms of executing a bank-reform programme, it is a matter of corporate restructuring.”

In recent months, Germany, flanked by Netherlands, Luxembourg and Finland, has lobbied to limit the ECB’s supervisory powers, in opposition to France, Spain and Italy. Bankers say the EU banking union plan is now held hostage by, among other things, resistance from Germany, which fears the plan will put the country’s depositors at risk over bank failures in neighbouring countries.

 Governor Stefan Ingves, Swedish central bank governor 

Ingves also laid bare similar fears, citing concern that the banking union plan could be seen as a thinly veiled fiscal union. Echoing fears held by non-euro member states over the prospect of bearing the liabilities of their eurozone partners, he said: “It’s not surprising that this discussion is going on within the EMU itself, but if you are going beyond the EMU countries then you need to find a way of balancing the interests of the non-EMU interests, so you don’t end up with taxation without representation.” This view was echoed by Nils Bernstein, chairman of the board of governors of Danmarks Nationalbank, who told Euromoney: “One of the problems is that it seems that the euro-area countries are given some sort of upper hand in this, in so far as the countries outside the euro area can opt in but not on the same conditions as far as voting is concerned. "

The large cross-border activities of the non-eurozone domiciled banks, the fact non-eurozone states do not have a vote at the ECB and the outstanding intra-eurozone dispute over burden-sharing suggest the end-year deadline for agreement is ambitious, the Nordic governors said.

Ingves said: “When it comes to implementing bank resolution regimes and cross-border deposit insurance, then you get into very difficult cross-border problems and that will take some time to sort out. The difficulty is down to the fact policymakers need to reach agreement on who pays for what, when and why, and that takes time to finalize.” 

Bernstein agreed: "The timetable for this to be decided is before Christmas but I don’t see that as realistic. It is very complicated and one should give oneself enough time to look into these matters very carefully. In addition to supervision, there are other questions around how the proposed deposit guarantee and resolution scheme will fit into this."

German resistance

Germany has expressed a desire for its national regulator to remain the principal supervisor of its savings and co-operative banks, in particular. Speaking at the Institute of International Finance meeting on the occasion of the IMF/World Bank meetings in Tokyo last month, Elke König, president of Germany's Federal Financial Supervisory Authority, said: “Banks that are not systemically important should, as a matter of principle, continue to be supervised nationally because national supervisors are better able to assess the particularities of local banks and their environment.”

However, market players say Berlin’s resistance also reflects its wish to avoid outside powers scrutinizing the sorry state of the German banking system, with €196 billion of non-performing loans outstanding, topping the European NPL league table, according to July 2012 data from PwC.

As Euromoney has reported, over-zealous national supervisors in the euro-area have also imperiled the banking union drive by pushing to reduce the fungibility of liquidity and capital for cross-border EU banks.

Nevertheless, the need to bail out sovereigns in peripheral Europe, aimed, in part, at financing bank-capital shortfalls, throw into sharp relief the need for more effective integration and clarity on burden-sharing, Ingves concluded.

“As corporate restructuring intensifies, you are still stuck with the issue of where the money is going to come from, who loses, if the money is not returned, and who controls the bank in question,” he said. “All this means that banks in trouble have to shrink and someone has to be in charge of that process and be accountable.”

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