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Banking disunion

12 September 2012 By George Hay

Europe’s new banking union still faces multiple battles.

The most basic flashpoint is how many banks should be regulated by the European Central Bank, which will call the shots under the new single supervisory mechanism. The Commission envisages the ECB having authority over all banks. But Germany, whose local savings banks are politically well connected, only wants systemically important lenders covered. The Commission’s case is strong: after all, lots of small banks from Ireland, Greece, Spain and Cyprus have caused havoc in the crisis. But Germany has immense clout in Europe’s counsels.

A second flashpoint is over how soon troubled banks come under the ECB’s aegis. The Commission wants this from the start of next year. It is right to push for speedy action. After all, it is only then that the euro zone’s bailout fund, the European Stability Mechanism, will be able to take equity stakes in the troubled banks such as Spain’s cajas. Unfortunately, Germany is playing for time – perhaps because it doesn’t want its taxpayers’ money injected into foreign banks before next year’s general election.

A third flashpoint will be how to get the 10 European Union members not in the euro zone, in particular Britain, to bless the scheme. Although their banks won’t have to submit to the ECB’s supervision, they are concerned that they could be outvoted if the euro zone states club together to set banking rules in the EU. The Commission has made a half-hearted attempt to address these concerns by beefing up the powers of the European Banking Authority, which oversees implementation of banking rules through the EU. But it’s most unlikely to be enough to satisfy the UK – which along with every other EU country has a veto on the Commission’s new supervisory mechanism.

As if these issues were not enough, the Commission has deferred until later other controversial planks of its planned banking union: how deposit insurance will work and how failing banks will be closed down. The new supervisory mechanism is supposed to be nailed down by the end of this year. It will be hard to hit that deadline; and even if that’s possible, the new system could look rather different from what the Commission intends.


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