Bankers cool on European banking union plan
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Bankers cool on European banking union plan

For all the grandiose rhetoric of a banking union as a way to resolve the eurozone crisis, bankers at the Institute of International Finance meeting feared the EU's single market in financial services is disintegrating before their very eyes.

As European policymakers struggle to find a way out of the seemingly unending crisis – one that has bound banks and sovereigns like two struggling swimmers trying to hold each other above the waves but only dragging each other under – a new solution has suddenly grabbed the headlines: a banking union.

Speaking at the Institute of International Finance (IIF) meeting in Copenhagen on Thursday, Michel Barnier, European commissioner for the internal market and services, and the driving force behind adoption of new regulatory initiatives into law, offered a breathless update on recent calls for even more integration of the eurozone banking sector.

“Ideas will be presented to the European Council (EC) by president [of the European Commission José] Barroso and president [of the EC Herman] Van Rompuy at the end of this month,” he says. “This is very important and we are working on it in that sense.”

There were many in his audience eager for the urgent adoption of the key building blocks for such a banking union – a European supervisory body for banks, a new resolution frameworkfor troubled institutions and a deposit-guarantee scheme.

Wolfgang Münchau, co-founder and president of Eurointelligence, even went so far as to declare: “If we don’t get at the very least the contours of a banking union in the next three weeks, then I fear the euro will not survive. We will be going back to our national currencies.”

Francisco González, chief executive of BBVA, while insisting that Spain is a “solvent and trustworthy partner”, and pointing to the radical reform of the country’s banking system that is likely to wipe out the savings bank sectorand reduce the number of financial institutions from 60 to 10, joined the call.

He wants the European Union to set out a road map to define the steps required for the creation of a European banking union, a greater fiscal integration and some form of debt mutualization.

It is not just the most immediate storm around how to fund the needed equity injection into Spanish savings banks that is prompting such calls. Bankers attending the IIF meeting report that the single market in financial services in the EU is disintegrating before their eyes.

One says: “You have episodes of the relationship between home and host-country regulators breaking down, with some national regulators pressing to ring-fence assets in the country, while discouraging banks from lending to other countries within Europe.”

The IIF’s chairman Douglas Flint, chairman of HSBC Holdings, says: “Earlier reactions to the financial crisis, now reinforced by acute uncertainty over the eurozone, is leading to risk-management and regulatory actions that lead to home bias and concerted reductions in cross-border financing. To some extent, banking systems are becoming more national, less global. The result is rising fragmentation and balkanization of the financial system.”

Yet the notion that a true European banking union can suddenly be summoned into existence in a matter of weeks at the height of the crisis strikes many in the markets as utterly fanciful.

“It’s a nice-sounding idea but it’s just a concept,” says Stefan Ingves, governor of the Riksbank, member of the European Central Bank (ECB) general council and chairman of the Basle Committee on banking supervision. And plenty of bankers share his view.

Fanciful idea

The European Union internal market commissioner, Michel Barnier, 
 Michel Barnier, EU

Philip Suttle, deputy managing director and chief economist of the IIF, notes on the question of a banking union: “If you think it is a stretch to ask German taxpayers to stand behind the liabilities of non-German government, how would you rate the chances of them standing behind non-German banks?”

There are, after all, corners of Europe where small, locals banks have, often with little supervision and sometimes at the prompting of local politicians, channelled funds to local projects with local benefits.

“Banking union may come five years from now or 10, but right now it is not the answer to the immediate and pressing problems,” says one banker. “Let’s not mix up what needs to be done right now with the long-term vision for what might be nice to have if the single currency survives.”

Yet it’s possible that such understandable cynicism to another grandiose European concept might miss the mark and that, in the midst of the crisis, a banking union might be the back door to fiscal union.

Barnier points out that two of the three key building blocks are in place. A supervisory body of sorts exists in the European Banking Authority. For now, it lacks the credibility of an institution, such as the ECB, but it has conducted stress tests and overseen the recapitalization process demanded by heads of government in October. Just this week, the commission proposed its new framework for bank resolution.

Barnier adds: “And the Commission made a proposal for more integration between national deposit guarantee schemes two years ago. All these measures are fundamental cornerstones of a banking union. Some of them are in place. Others should be adopted shortly.”

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