European Bank Union Will Fail

When it was suggested it was considered in the blazing battles of the bail-outs and the scraping of the bottom of the drawers for extra cash as the God-sent answer to all EU woes and worries. Suddenly, Eureka, and Angela Merkel jumped out of the bathtub and ran down the streets of Brussels starkers, as the leaders of Europe pledged to save the world. Or, at least to save their world. Sever all ties between the failed governments and the failed states of the Eurozone and the banks that were on their last legs too and create a banking union. But, unlike Archimedes’ sudden realization that his body underwent an upward buoyant force after being immersed in water, the Eurozone will be seeing no such buoyancy in its finances after the banking union is put in place. Relatively little will happen except being washed away by the flow of water and disappearing down the plug hole of Merkel’s ‘bad’. There certainly won’t be any upward exertion or any buoyancy and the only think getting displaced will be taxpayers’ savings. But, maybe it’s not that different after all; Archimedes did discover that the upward buoyancy was equal to the weight of the fluid being displaced in that bathtub. So, the Eurozone should expect to have a damn great tsunami wash over their heads judging by the weight of their debts.

EU: Bank Union?

EU: Bank Union?

The European Commission announced on September 12th 2012 that it had the intention of blueprinting a package of measures that would be designed to provide financial assistance to members of the Eurozone that were in need due to weak economies. In a joint-package between Germany and France, thinking heads were banged together to come up with the scheme. But, it all seems rather doomed to failure already when a country like Germany, that is in a far-better position than countries like Greece or Spain, should think up a plan that is intended to ensure that those countries don’t go bankrupt. It’s once again the rich preaching to the poor, rather than the wealthy safeguarding the less well-off. How could Germany imagine what would be needed by Greece or Spain, when half the plan would involve Germany actually paying for the consequences of the economic and financial mistakes of another country?

The banking union in Europe will fail before it has even begun.

It’s doomed quite simply because there should be three key safeguards to back it up. A three-legged union is the only way to make sure that it is going to succeed. But, when Merkel jumped from her tub and ran down the streets, she forgot that three legs are better than two.

  • The first safeguard is the single supervisor that is the European Central Bank that will write the regulations and make sure they are enforced. The police of the banking system; if Mario Draghi can be seen in that role. The Single Supervisory Mechanism (SSM) will be set up and working by the end of 2014.
  • The second leg to stand on will be the Single Resolution Mechanism (SRM). The SSM (through the ECB)would inform the Single Resolution Mechanism Board that a bank is failing. The SRM would then decide on which tools to implement with the objective of resolving the bank, alongside national resolution bodies of the country concerned.

    EU Banking Union Merkel and Draghi

    EU Banking Union Merkel and Draghi

The first two will be in place. But, the third safety mechanism should be the fund that would be large enough to shore up any failing bank and make sure that any EU-citizen’s Euro was safe, whether it might be in Athens, Madrid, Bonn or Paris. But, that’s the problem; the European Stability Mechanism (ESM) will only come into play as a last resort, once the country has crippled itself trying to save the bank in question on the order of the ECB, the SSM and the SRM. The banking union will fail partly because no agreement would be reached on any fund (because taxpayers here will not want to pay for failed banks there) and solidarity can go to the wind, but also because the EU has a disparity in its bankruptcy laws and there is no unity. The ECB through the SRM may be well in a position to stop regulator-bank relations or at least control them. But, once the problems have been discovered, it will be largely up to the government of that bank to deal with the problems that arise.

The European Central Bank, as supervisor of the operations of European banks, would be overseer of the health of banks in the EU, making sure that the whip gets cracked when it needs to. But, in the event of a financial shortfall being found, then the whip-cracking will come too late. The horse will already have bolted and the stable door will have gone with it instead of just flapping in the wind. If shortfalls are found, then the ECB will just end up standing round the gaping hole looking down and rubbing its chin perplexed as to what it might do. There will be no pot of gold or spare cash hiding under Merkel’s or Hollande’s bedside tables to fill that hole since that is not part of the plan. So, we will have unveiled the gap and have nothing to fill it with. Eureka! Now, that sounds scary. There are times when ostrich-politics might just be the best thing to do. Burying your head in the sand and waiting for the storm to pass would be their safest bet. Agreed, their even-better bet would have been to set up a little slush fund to filter money into those banks, lest they should need to be shored up. Then, everybody would have been happy.

Commission President José Manuel Barroso stated in a press release on July 10th 2013: “With this proposal, all the elements are on the table for a banking union to put the sector on a sounder footing, restore confidence and overcome fragmentation in financial markets. We have already agreed common European supervision for banks in the euro area and other Member States who wish to take part”. But, that’s not quite true, apparently. Confidence has not been restored and far from it. Now, according to a survey carried out by Fitch Ratings Ltd on the adequacy of the European banking union to insure against default risk.

  • According to the results of the survey, the banking union will not insure against default risk of a bank in the EU at all for the majority of the people interviewed.
  • 39% of the people interviewed believe that the failure of the system will be because the third key element is missing.
  • There is no ‘centralised deposit insurance’ to be fully implemented.
  • 27% believe that ‘independent resolution’ means that there will be little support given to a failed bank.
  • 6% believe that the mechanism as it stands will be ‘insufficient’.
  • That means that 72% of those people interviewed believed that the mechanism will not succeed in insuring against default of a bank.
  • The Fitch survey was carried out throughout July.

    Fitch Ratings: Bank Union

    Fitch Ratings: Bank Union

Some believe that the European Central Bank’s credibility could be lost in the event of the bank turning round and saying that they won’t raise the capital that they have been told to do. What would the ECB do and who would they turn to implement the resolution tools? What legal recourse would they have? Little, if any at all.

The problem of the EU is to have believed that one problem has one solution. The banks’ problem is that they need a supervisor. So, the EU sets up the Single Supervisory Mechanism. The SSM discovers that a bank has a problem financially and comes up with one solution to the problem: telling the bank to raise capital. But, there are other solutions that should have been put in place to ensure that default risk.

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