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Abu Dhabi, UAEFriday 5 March 2021

In Europe a banking union remains elusive

If anything, the centrifugal forces resisting closer co-operation appear stronger than those pushing for greater integration

German Finance Minister Olaf Scholz wants a merger between Deutsche Bank and Commerzbank. Reuters
German Finance Minister Olaf Scholz wants a merger between Deutsche Bank and Commerzbank. Reuters

Ask for a concrete example of the euro zone’s march toward further integration, and you will soon hear the words "banking union".

At the height of the sovereign debt crisis, European leaders agreed to move supervision of the region’s most important lenders to the European Central Bank, create a single rule book, and start centralised funds to deal with future banking crises.

The project has made some progress, but is now under threat. Politicians and domestic supervisors are seeking to constrain what the ECB can do. They are also pressing for national – rather than cross-border – solutions to deal with their ailing domestic lenders.

Banking union remains a half-way house without a joint guarantee programme that can reimburse depositors of failing lenders. If anything, the centrifugal forces appear stronger than those pushing for greater integration.

The attacks on Europe’s banking union – and on the ECB’s supervisory powers in particular – are part of a broader hostility towards the transfer of power to technocrats, especially those in Brussels or Frankfurt.

In his retirement speech last month, Ignazio Angeloni, a former member of the ECB Supervisory Board, described how “national sovereignty seemingly contradicts the logic of the banking union, which implies transferring certain policy functions to the supranational level”. He also noted how “supervisory independence deviates from direct democracy, which populists favour”.

These are difficult challenges. But populists are hardly the only ones pushing back against the principles underpinning the project. In Italy, successive centre-left governments and the central bank have repeatedly contested the rules governing bank failures, in particular the principle that bondholders should take losses.

In Germany, Olaf Scholz, the social democrat finance minister, is supporting a merger between Deutsche Bank and Commerzbank in the hope of creating a national champion to help domestic companies. Last year, the European Parliament, where the populists are in a small minority, frustrated the ECB’s attempts to set more stringent rules about how banks should write down their non-performing loans, saying they amounted to over-reach. Even an EU court has recently ruled against the European Commission, saying it cannot prevent member states’ national guarantee programmes from rescuing failing banks, as it did in Italy in 2014.

Moreover, European leaders have proven incapable of accelerating the completion of the banking union, leaving it stuck in an uncomfortable no man’s land. True, the European Council decided at the end of last year to strengthen the Single Resolution Fund, the common fund used to help winding down a bank. But the pool remains too small to deal with a systemic crisis, and any move to set up a joint deposit guarantee fund has been opposed by Germany.

National authorities face a greater temptation to go it alone. Italy has circumvented the rules on several occasions, setting up voluntary rescue funds to prevent troubled banks’ bondholders from taking losses. The ruling on deposit guarantee programs (which the European Commission can still appeal) may prompt some member states to stop pushing for a joint safety net, fearing it could have stricter rules than their own national ones. The looming Commerzbank-Deutsche Bank merger could soon put the German government on a collision course with the ECB.

European supervisors therefore face a dilemma: if they cave in to the will of the politicians, they lose both their credibility and their raison d’etre. Conversely, if they act too aggressively, they risk being stripped of the powers they have received.

The answer must be to combine a firm interpretation of the rules with more transparency. Mr Angeloni noted that while supervisors are typically asked to contribute to the “safety and soundness” of the institutions, there is little agreement over what this means. This is very different from the monetary policy mandate of most central banks, which typically takes the form of a specific target. A more precise definition of the supervisors’ objectives could be useful.

Moreover, it is important that the Single Supervisory Mechanism does a better job at explaining what it expects from banks, especially with regard to capital requirements. The European Parliament must allow the supervisors to do their job, rather than crying foul when these demands are too specific. But the onus must fall also on the ECB, which has too often neglected to communicate its requests clearly to both investors and the public.

Andrea Enria, the new chairman of the ECB Supervisory Board, has made enhancing transparency one of his priorities. In the past, he has argued that Europe should change the way it runs its stress tests, announcing their results alongside any demands for a capital raise so as to avoid confusion. At a time of rising populism and economic nationalism, such moves toward more transparency may be insufficient to save the banking union.

But they are its best hope, at least until politicians rediscover its relevance.


Published: April 3, 2019 08:00 AM


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