Tuesday, May 14, 2013

EU Banking Union, In Several Years, Maybe!

During a recent trip to the UK, head of the International Monetary Fund, Christine Lagarde endorsed talks to move forward on a EU Banking Union. In Brussels the president of the euro zone’s group of finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said it would be “dangerous” to delay moving ahead with a banking union and that some of the bloc’s biggest banks could reveal new vulnerabilities as their accounts come under scrutiny in the next few months as part of a new round of so-called stress-test audits are conducted. Last month Germany's, Mr. Schäuble conceded that a banking union could go forward under current E.U. law, but he still insisted then that treaty change would eventually be needed for a new single banking supervisor, under the aegis of the E.C.B., Germany has considerable clout in the banking union debate because of its role as the strongest economically. 

E.U. leaders agreed last year to create a banking union as a way of breaking the so-called doom loop. This is the vicious circle in which states go so deeply into debt to support failing banks, that it forces a country to seek a bailout or risk causing it to leave the euro zone. The agreement of creating a banking union in principle has been hard to put into practice, a standard process for winding down troubled banks would be a key component the union. The effect of huge bank debt on state finances almost forced Ireland and Cyprus to leave the euro zone before they received bailouts. And is now a major concern for Spain, which has received banking bailout money from the euro zone, and Slovenia, which is scrambling to avoid asking for a bailout. 

Talk, talk, talk, yes more talks are planned soon as the euro zone finance ministers are to again gather in Brussels for a monthly meeting overseen by Mr. Dijsselbloem. He is expected to lead talks to make progress on a rule book for directly injecting funds from the European bailout fund into troubled banks. Then finance ministers from across the bloc will join the meeting for discussions expected to focus on rules for dealing with creditors in order to shut down banks without putting the burden on taxpayers. National representatives meeting in Brussels this week are trying to resolve differences about which bank depositors should be forced to bear losses.

Do not be deceived that this addresses the crux of the problem, which is one country ponying up money to bail out another, or its banks. The solvent and rich countries are not in any way committing to a transfer of wealth. The proposal, which could become law in the European Union in three years, requires banks to shoulder the administrative burden when clients switch accounts, such as transferring direct debits. The draft law will also demand that banks spell out their charges in a standardized way, making it easier for customers to compare. Efforts to cajole banks into better self-regulation has not worked. The Commission will also suggest giving citizens the legal entitlement to open an account, it wants at least one bank in each country to offer a basic account, this would allow people currently outside the banking system to deposit cash and pay bills.

Common deposit guarantees will be necessary to complete the European banking union project, “That will be the final building block of the banking union, a necessary block,” Dijsselbloem, said. Precursors include new rules on bank resolution, common standards for national deposit guarantees and a European bank resolution scheme that is due to be proposed in June, he said. European Union leaders began work on a banking union last year to break the cycle of contagion between nations and their banks that has plagued the euro area in the past three years. Leaders started by giving the European Central Bank bank supervision powers throughout the euro area.

Dijsselbloem initially said the Cypriot rescue would become the new template for the euro zone, but later recanted. European officials have since moved to speed up implementation of new rules, even ECB President Mario Draghi said on April 4 that the rules need to go into effect as early as 2015 and not be delayed until 2018 as originally planned. Still these talks have not ruled out depositors being included in a bail-in. If that model is used in troubled Slovenia, depositors could be forced to share the costs. Draghi has said he favors modifying the proposal to elevate all depositors above other creditors. The shift from blanket protection of almost all bank creditors to demanding they share restructuring costs has contributed to higher borrowing costs for the financial institutions in the weaker countries,

With all this endless talk about what they will do, or might do, down the road, the ECB keeps banging away at Germany to do more, and sooner rather then later, but that may never happen. Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started. The governor of the Bank of England was right, of course. With the agreement on a depositor haircut for Cyprus the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. With this action, the finance ministers of the eurozone may well have started a bank run, if you do not protect depositors they will simply run away, flee to safer areas, and that is a fact that you can take to the bank!

Footnote; Money is already moving around the nervous euro zone region, and out of the euro and into other parts of the world. While few are talking about it this may be causing a bubble in Germany and its stock market, for more on the subject please read the post below,


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