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A Banking Union? You must be joking!

For the last decade,
I’ve been a fan of the Eurozone.

It’s created a lot of
business for many of us.

The Financial Services
Action Plan (FSAP), the forty or more Directives, the Single Euro Payments Area
(SEPA) and all that stuff has been good for business for consultants,
technologists and for some bankers too.

But life is what
happens to you whilst you’re busy making other plans, so the bank plan has
encountered a rocky course in recent times.

The sovereign debt
crisis across Europe and the associated issues with the PIGS (Portugal, Italy,
Ireland, Greece and Spain) has derailed the plan.

The rumours of Euro fragmentation
and the divide of the North and South of the Eurozone led to many questioning
whether the Euro had a future.

There’s rumours of De
La Rue printing Greek drachma and  even the former Chief Accountant to
the European Commission admitting that the Euro has a weak future.

So we are either in
the last gasps of the Euro or at the point it all turns around.

It may well be the former as ECOFIN,  the Economic and Financial Affairs
Council, meets today.

ECOFIN is composed of
the Economic and Finance Ministers of the 27 European Union member states, and
the aim of today’s meeting is to ratify the plans for a European Banking Union (see end of blog for full detail on what this means).

The European Banking
 is a plan proposed in September to overcome the weakness in the Eurozone by having a single supervisory regime
for all Euro states.  Downstream a
resolution mechanism and depositary insurance scheme would also come into

The aim is to have
this agreement in place by January 2013, and effectively give the European
Central Bank (ECB) complete control to manage the 6,000 banks in the Eurozone.

And there’s the rub as it
won’t work.

The reason it will not work is that we
have a four-stream Europe.

The first divide in Europe is between Euro and non-Euro
member states.

That is the core chasm that destabilises any Banking Union.

We then have a further
divide between the stable countries in the Eurozone – isn’t that just Germany?
– and the unstable countries – the PIGS.

That further destabilises the Banking Union.

And finally there’s another divide between non-Euro countries in the European Union and other non-Euro countries in the Extended European Economic Area: Iceland,
Liechtenstein and Norway.

What you end up with is a
complete mess, and that’s what the regulators and politicians are trying to
deal with today.

Does a Banking
Union solve the mess?


If it comes into
force, the first thing it does is stabilises the Eurozone but destabilises the
European Union.

The reason being that
the non-Euro countries will feel that too much control is being created in the
Eurozone and that they will either be forced to join the Euro or leave the Union.

Britain feels that way
already, and Sweden and Hungary appear to feel the same. 

Even then, does a
Banking Union solve the crisis?

I’m not sure as it
will mean that German depositors will be bailing out other nations without even
knowing, through the Depository Insurance Scheme.

This is the
fundamental issue that the Germans, and particularly the Sparkassen banks, have with the scheme and why Germany has
been reticent about a Banking Union.

If they are reticent
now, see how enraged they will become when they find Germany dragged down as an
economy and society by other Eurozone nations.

The fact is that the
Banking Union is the inevitable outcome of an Economic & Monetary Union
(EMU), but is unworkable.

When EMU was
created, no-one saw the true end-game result (except
possibly Margaret Thatcher).

The start is a
monetary union.

That builds into a
currency union.

That develops into an
integrated and harmonised financial market, which leads to a Banking Union.

That proceeds into a
harmonised fiscal and legal structure, which results in a Country Union.

A Country Union sees the integration of borders and loss of national identity and control.

In other words, all of Europe integrates into a single territory controlled by … 


It is the latter
points that are the biggest blockage to the Banking Union plans, and it will
result in fragmentation and divide across Europe.

It is workable, but only if the countries that do not want to be part of an integrated Europe – Britain, Sweden, Hungary and others – leave the European plan.

Meanwhile, as the
recently noted, France is the linchpin that keeps the plan together
and France has equally got a lot of domestic issues to resolve.

Which means the only
country that can hold the Euro plan together is … Germany.


17 Member States of
the European Union use the Euro as their currency:

  • Austria
  • Belgium
  • Cyprus
  • Estonia
  • Finland
  • France
  • Germany
  • Greece
  • Ireland
  • Italy
  • Luxembourg
  • Malta
  • Netherlands
  • Portugal
  • Slovakia
  • Slovenia
  • Spain

10 Member States of
the European Union do not use the Euro as their currency:

  • Bulgaria
  • Czech Republic
  • Denmark
  • Hungary
  • Latvia
  • Lithuania
  • Poland
  • Romania
  • Sweden
  • United Kingdom

3 non-Euro countries
in the Extended European Economic Area:

  • Iceland
  • Liechtenstein
  • Norway

6 non-European Union
nations have adopted the Euro as their currency:

  • Andorra
  • Kosovo
  • Monaco
  • Montenegro
  • San Marino
  • Vatican City


What is the European Banking Union?

Here is the full press release from the European Commission that details the plan for a European Banking Union.

Towards a banking

At the European
Council of 28/29 June, EU leaders agreed to deepen economic and monetary union
as one of the remedies of the current crisis. At that meeting, the leaders discussed
the report entitled 'Towards a Genuine Economic and Monetary Union'1,
prepared by the President of the European Council in close collaboration with
the President of the European Commission, the Chair of the Eurogroup and the
President of the European Central Bank. This report set out the main building
blocks towards deeper economic and monetary integration, including banking

On 12 September, the
Commission will present proposals to design a single banking supervision
mechanism in the euro area, further strengthening its response to the current
crisis. This proposal will not change rule-making for the single market of 27
countries, but change the way in which banks in the Euro area will be
supervised; hence it will fully preserve the integrity of the single market. A
single supervision mechanism, built around the European Central Bank (ECB),
will be a major step forward. It will send a strong political signal of
credibility to our partners and to global investors. It will show once again
the irreversibility of the euro.

The remaining building
blocks for a genuine Economic a Monetary Union will include not only the
remaining pillars of the Banking Union (single rule book for financial
institutions in the single market, strengthening deposit guarantee schemes, and
establishing national resolution funds and legislation), but also an integrated
budgetary framework (Fiscal Union), an integrated economic policy framework
(Economic Union) and a strengthened democratic dimension (Political Union).

1. What do we want
to achieve with banking union?

1.1 What is the
banking union that we wish to implement?

When the financial
crisis spread to Europe in 2008, we had 27 different banking regulatory
systems in place, all based on national rules and national rescue measures.
Some form of European coordination existed but it was related to exchanges of
information and rather informal cooperation procedures.

This was not
sufficient to respond to the financial sector crisis and its contagion to
sovereigns. A fully-fledged banking union will be key to supporting economic
and monetary integration. Pooled monetary responsibilities have indeed spurred
closer economic and financial integration, and increased the possibility of
cross-border effects in the event of bank crises.

Common and more
integrated banking supervision for the Euro area is one important pillar
to make sure that supervision abides by the highest standards. This will build
the necessary trust between Member States which is a condition for using common
backstops, notably the direct recapitalization by the ESM of banks. Once common
supervision for the Euro area is in place, the Commission's intention is to
build on existing proposals for deposit guarantee schemes and bank recovery and
resolution, moving towards a more integrated approach also in these areas.

1.2 Why do we want
to achieve this banking union?

  • To break the link between Member States
    and their banks
    : Between
    October 2008 and October 2011, European countries have mobilised €4.5
    trillion in public support and guarantees to their banks. This is not
    acceptable. With its proposal on capital requirements for banks ("CRD
    IV") made in July last year, the Commission wants to ensure that the
    capital of banking institutions is sufficient both in quantity and in
    quality to face future shocks. The future European Stability Mechanism
    (ESM) could have the possibility to recapitalise banks directly once a
    single supervisory mechanism is established for banks in the euro area.
    This will contribute to breaking the vicious circle between banks and
    sovereigns as the ESM loans would not add to the debt burden of countries
    facing intense market pressure.
  • To restore the credibility of the
    financial sector
    : The
    proposals already tabled by the European Commission to improve
    regulation of the financial system represent a solid basis to go further
    in the harmonisation of our rules, which will be made easier in the
    framework of a banking union. The European single supervisory system
    for banks will enable a fully rigorous and independent
    supervision of our banking sectorGiving to the ECB the
    ultimate responsibility for supervision of banks in the euro area will
    contribute to increasing confidence between the banks and in this way
    increase financial stability in the euro area.
  • To preserve tax payers' money: In early June, we proposed EU rules for
    bank recovery and resolution. To make sure that supervisory authorities
    have all the tools they need to deal with bank failures without taxpayers'
    money. This also aims to protect taxpayers' money and deposits.

To make sure that
banks serve society and the real economy
: With our financial regulation agenda, we are improving financial
markets' effectiveness, integrity and transparency in order to make sure that
the funds available finance the economy.

2. EU banking
union: what have we done so far?

For each of the four
pillars of the banking union (i.e. single rulebook; supervision; deposit
guarantees; and bank resolution), the Commission has already taken action
providing a solid basis for developing them further.

2.1 Measures to
allow for more integrated banking supervision

Three European
supervisory authorities (ESAs)
work on 1 January 2011 to provide a supervisory framework:

  • the European Banking Authority (EBA)
    which deals with banking supervision, including the supervision of the
    recapitalisation of banks, as well as the coordination and dispute
    settlement of national supervisors
  • the European Securities and
    Markets Authority
     (ESMA) which deals with the supervision of
    capital markets; and
  • the European Insurance and
    Occupational Pensions Authority
     (EIOPA), which deals with
    insurance supervision.

The 27 national
supervisors are represented in all three supervisory authorities. Their role is
to contribute to the development of a single rulebook for financial regulation
in Europe, solve cross-border problems, prevent the build-up of risks, and help
restore confidence. Individual ESAs have specific roles: for example ESMA is
the EU supervisor of credit rating agencies, while EBA and EIOPA carry out
"stress tests" of their respective sectors. EBA has also overseen the
current recapitalisation exercise of EU banks. ESMA can ban products that
threaten the stability of the overall financial system in emergency situations.

In addition, the
European Systemic Risk Board (ESRB) has been tasked with the macro-prudential
oversight of the financial system within the Union.

This new financial
supervision framework has been in place since November 2010.

EBA has quickly
established its credibility as a new body, delivering within the constraints of
the rules agreed by the Council and the European Parliament, which are centred
on an approach of EBA coordinating national supervisors. EBA will remain a key player
of the banking union. For more information on the 2010 financial supervision
package, see MEMO/10/434.

On 12 September, the
Commission will present a regulation establishing an ambitious single
supervision mechanism for banks in the Euro area. The Commission expects these
proposals to be adopted by the end of the year, in order for the new system to
enter into force early in 2013, as a key component of a banking union.

This proposal will
address the key questions of the concrete functioning of the new supervisory
role for the ECB; the relationship between national supervisors and the ECB;
defining the relationship between euro area countries and those not
participating in the euro. In addition, the Commission will present an amending
regulation clarifying the role and governance of the European Banking Authority
in this context.

2.2 Towards a
single rule book for the banking sector

The European Council
of June 2009 unanimously recommended establishing a single rulebook applicable
to all the financial institutions in the single market.

With its proposal on
capital requirements for banks ("CRD IV") made in July last year (see IP/11/915 and MEMO/11/527),
the Commission launched the process of implementing for the European Union the
new global standards on bank capital agreed at G20 level (most commonly known
as the Basel III agreement). It is recalled that banking institutions entered
the crisis with capital that was insufficient both in quantity and in quality,
leading to unprecedented support from national authorities.

Europe is playing a
leading role on this matter, applying these rules to more than 8,000 banks,
representing 53% of global assets. The Commission proposals are currently being
discussed by the Council and the European Parliament and the Commission is
determined that an agreement be reached shortly.

With this legislation
the Commission also wants to set up a governance framework giving bank
supervisors new powers to monitor banks more closely and take action through
possible sanctions when they spot risks, for example to reduce credit when it
looks like it is growing into a bubble. European supervisors would intervene in
some cases, for example when national supervisors disagree in cross-border

Further, the
completion of the financial regulation agenda forms integral part of the
banking union. In this this vein, it is recalled that the Commission is also

  • to examine reform of
    the structure of the banking sector though the work of the high-level expert
    group headed by Erkki Liikanen (seeMEMO/12/129);
  • to regulate shadow
    banking (see IP/12/253);
  • to make credit
    ratings more reliable (see IP/11/1355);
  • to tighten rules on
    hedge funds (see IP/09/669),
    short selling (see IP/10/1126)
    and derivatives (see IP/10/1125 –
    regulation in force since 16 August 2012);
  • to curb banking pay
    practices that encourage recklessness (see IP/09/1120);

2.3 Action taken to
offer more protection to bank depositors

Thanks to EU
legislation, bank deposits in any Member State are already guaranteed up to
€100,000 per depositor if a bank fails. From a financial stability perspective,
this guarantee prevents depositors from making panic withdrawals from their
banks, thereby preventing severe economic consequences.

In July 2010, the
Commission proposed to go further, with a harmonisation and simplification of
protected deposits, faster pay-outs and improved financing of schemes, notably
through ex-ante funding of deposit guarantee schemes and a mandatory mutual
borrowing facility between the national schemes. The idea behind this is that
if a national deposit guarantee scheme finds itself depleted, it can borrow
from another national fund. This would be the first step towards a pan-EU
deposit guarantee scheme. This proposal is still being discussed by the
Council and Parliament in second reading. The Commission calls upon the
legislators to speed up the process of co-decision on this proposal, retaining
the mutual borrowing facility, and agree by the end of 2012.

In managing a number
of bank crises over recent years, national authorities have often created a new
structure out of the failing bank and transferred some critical functions of
the bank to this structure, such as safeguarding deposits. These resolution mechanisms
make sure that depositors never lose access to their savings (for example in
the case of Northern Rock, the bank was split into a good bank, which contained
the deposits and good mortgage loans, and a so-called "bad bank"
winding down the impaired loans).

For more information
on the Commission's proposal for a European system of deposit guarantee
schemes, see IP/10/918.

2.4 Action taken
towards a single European recovery and resolution framework

The Commission's
proposal on recovery and resolution tools for banks in crisis, adopted on 6
June (see IP/12/570 and MEMO/12/416),
is the last in a series of proposed measures to strengthen Europe's banking
sector and avoid the spillover effects of any future financial crisis with
negative effects for depositors and taxpayers.

To ensure that the
private sector pays its fair share in any future bailouts, the EU has
proposed a common framework of rules and powers to help EU countries intervene
to manage banks in difficulty. Repeated bailouts of banks have created a
situation of deep unfairness, increased public debt and imposed a heavier
burden on taxpayers.

A common EU-wide
framework for the managed resolution of banks and financial institutions would
offer tools to prevent crises from emerging in the first place and address them
early on if they do. The proposal also foresees the mechanisms that national
authorities need to put in place to resolve banks in an orderly fashion if need
be, with a "bail-in" mechanism from 2018 onwards to call on
shareholders and creditors when attributing losses of failed banks. The
proposal also foresees the creation of national resolution funds paid for by
national banks in order to cope with the few cases where bail-in would not
offer sufficient resources to pay for restructuring and closing down of banks.

The ultimate aim of
the proposal is to make sure that the financial sector pays for its own failings,
rather than having to call on taxpayers' money. If a national resolution fund
would not have sufficient resources to pay for a restructuring, the proposal
asks Member States to investigate the option of an extra levy on its banking
sector, before calling on the option to borrow from national resolution funds
of other EU Member States.

3. Banking union
and bank recapitalisation

The EU has already
taken action as regards the recapitalisation of banks in several ways.

For instance,
extensive financial sector conditionality has been included in the policy
requirements addressed to Member States that have received international
financial assistance.

With respect to the
banking sector, the required policy measures consist, on the one hand, of the
orderly winding-down of non-viable institutions and, on the other hand, of the
restructuring of viable banks. Higher capital requirements, recapitalisations
of banks, stress tests, deleveraging targets as well as enhancing the regulatory
and supervisory frameworks have also been part of the policy initiatives. While
not specific to programme countries, these stabilisation measures are most
easily implemented in the context of international financial assistance.

The European Financial
Stability Facility (EFSF) can provide loans to non-programme euro area Member
States for the specific purpose of recapitalising financial institutions, with
the appropriate conditionality, institution-specific as well as horizontal,
including structural reform of the domestic financial sector.

At the euro area
summit on 29 June 2012, it was proposed that once an effective supervisory
mechanism involving the ECB was established for banks in the euro area, the
future European Stability Mechanism (ESM) could, following a regular decision,
have the possibility to recapitalise banks directly.

The ESM will have
a lending capacity of €500 billion. For euro area Member States not subject to
a programme, the ESM will have the possibility of providing a loan for the
specific purpose of re-capitalising financial institutions. The granting of
such financial assistance is subject to a positive decision of the Board of
Governors of the ESM, i.e. the finance ministers of the euro area Member
States. The conditionality attached to financial assistance shall be detailed
in a Memorandum of Understanding and will include institution-specific as well
as horizontal conditionality. Recapitalisations can also be conducted by a loan
accompanied by a fully-fledged macroeconomic adjustment programme. Modalities
regarding direct recapitalisation of banks by the ESM will be specified later
on but will also be subject to strict conditionality.

Specific bank
restructuring under these programmes and instruments goes hand-in-hand with the
conditionality of EU state aid rules.



About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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