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What does a Banking Union mean for Europe?

We had another great launch meeting of the Financial Services Club in Slovakia last week.

As with Norway, this was at the Ambassador’s Residence of the British Embassy, although the Bratislava Residence is very different to the Oslo one (read more at the end of this blog entry if interested).

The focus of the meeting was What does the European Banking Union mean for CEE banks? with a panel discussion comprising myself alongside:

  • Bob Fuller, Chief Administration Officer, Fixnetix;
  • Jozef Sikela, CEO, Slovenska Sporitelna; and
  • Marek Licák  Director of Macro-prudential policy department at the National bank of Slovakia

I didn’t record the whole evening, but here are a few rough notes of what was said.

First, the Banking Union has a very different impact in CEE to UK, for example.  The UK has London as its focus, and London is a global and universal financial centre.  Most banks in CEE have a local and domestic focus, unlike the UK therefore which has an international and global focus.

Equally, the Banking Union has been created to fix the sovereign debt crisis that hit Europe in at the end of the last decade.  In fact, it’s interesting to note that when the crisis first hit in 2008, Iceland, Germany, Switzerland, the Netherlands and the UK were all hit badly.

Add on the sovereign debt crisis where the PIIGS – Portugal, Ireland, Italy, Greece and Spain – were failing, along with Cyprus, France and Hungary, and you can see that over half of all EU countries’ banks were hit badly over the last six years.

Not all though.

For example, the Nordic banks along with banks in Slovakia had the required Tier 1 capital buffers to survive this crisis without impact.  Therefore, in the first instance, the question really needs to be why?

Why do all banks have to conform to this Union when some countries and some banks had no exposure to issues?

Why are some countries giving up their economic management to the ECB, when their regulators made sure that their banks and their economies were managed effectively before, during and after this crisis?

The answer is that the EU (European Union) cannot exist without a BU (Banking Union), and the Eurozone definitely cannot work without a BU.

It’s fairly obvious if you look at the USA.

Could the USA exist as it does if the Federal Reserve did not have oversight of the economy?

If each state managed its own policies and ignored the central bank, would the dollar survive as it does?

I don’t think so.

In fact, the idea of a federated economy, in the style of the USA, is exactly what Europe is trying to create.

In this vision, you have one central supervisor that determines interest rates and sets currency policy, and then each member state can create state taxes and structures that suit their own needs in addition to the central supervisor’s requirements.

In this vision, Germany is the District of Columbia, whilst the UK is the state of New York; France becomes some form of Detroit and the Netherlands is Massachusetts; oh, and Spain is California and Greece becomes Florida.

That’s what we’re working towards, and the BU holds it all together economically.  Of course, each state can have its own local governance, but the currency union with a strong central bank supervisor makes it all happen.

This is the Single Supervisory Mechanism (SSM) coming into force later this year, and it will have an impact, but mainly on the Eurozone countries.

After all the countries that are outside the Eurozone (Denmark, Norway, UK, Hungary etc.) will see no change after the SSM comes in per se, but the countries within the Eurozone will see a massive impact as all micro-supervision of the banking system will pass the ECB.  All that remains is some macro-supervision in these countries for financial stability and that’s about it.

It reminds me of the discussions with the EU policymakers a decade ago.

Back then, their view was that EU directives were difficult to agree, but the aim was to get agreement at the macro level.  It didn’t matter if all the interpretations of the Directives were different, as long as all the sheep were in the pen.

In other words, what mattered was to get agreement at the macro level from all EU countries.

So MiFID (the Markets in Financial Instruments Directive) and the PSD (Payment Services Directive) were agreed, admittedly with issues and omittances.

Then, the idea is that you keep making the pen smaller, boxing the sheep in and restricting their movement.

Hence MiFID2 and the PSD2.

Eventually, you have all the sheep facing the same direction in the pen and unable to move (CRDIV etc.).

That is what harmonisation really means in this move to an EU, and the BU is just a way of making the sheep’s pen smaller.

It is why Wolfgang Munchau, Economics Editor for the Financial Times, has been quite vocal about why the Banking Union is fundamentally wrong.

In December, Mr Munchau noted that:

“It is important to get a sense of the scale involved. The ECB will end up as the supervisor of 128 banks. Together these banks account for 85 per cent of all assets in the Eurozone’s banking system. The aggregate balance sheet of the Eurozone financial sector, excluding the central banks, was €31.4tn as of end-October. An approximate 85 per cent share translates to somewhere between €26tn and €27tn.

“The bank resolution fund for this new banking union will be built up over 10 years through bank levies. At the end of that period it will have reached €55bn – a mere 0.2 per cent of the asset base. Most of these banks have assets of more than €30bn. In a systemic crisis, in which banks can suddenly collapse, the whole European resolution fund could easily be swallowed by a single moderately sized bank.”

He expands on his treatise that the BU will not work this month, especially noting that the EU has drawn up five red lines before a bank can close:

“A decision to close down a bank has to be agreed over a weekend, while the markets are closed, to avoid creating panic. Under the proposed regime, agreement would be needed from all of the following institutions: the European Commission; the Council of Ministers; the European Central Bank; the supervisory board of the Single Supervisory Mechanism, the new bank supervisor; the executive board of the Single Resolution Mechanism, and its plenary council.”

Is this workable?


Is this BU workable in its current form?

According to Mr. Munchau, no.

I’d be interested to know what you think.

Meanwhile, back to the British Embassy and the Ambassador’s Residence.

The Residence is a former architect’s house:

  Ambassador's residence

and has a great conference room:

  Conference room

As well as wonderful views from the main lounge to Bratislava Castle:


Unfortunately, blocked by the recently opened Chinese Ambassador’s Residence.

  Bratislava view

Nothing like competition is there?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.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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