In a speech in Hong Kong on Wednesday, Benoît Cœuré, member of the executive board of the ECB, tried to tackle the key arguments still raging just one month before the supposed legal establishment of banking union, the topic likely to dominate the December EU summit.
As Matthew Mish, credit strategist at UBS, points out: “[Banking union’s] importance as an absolute pre-requisite for any sustainable EU solution should not be understated.”
However, quite apart from the debate over risk-sharing among eurozone nations that banking union must entail, Mish highlights the more immediate arguments about which banks the ECB, as a single supervisor, should regulate and about the share and weight of voting rights between eurozone and non-eurozone EU countries.
Mish suggests that: “The ECB and SSM [single supervisory mechanism] will need to be willing and able to stand up to national officials. Ultimately, the ECB must have control over all banks, particularly small and mid-sized ones that have caused instability, and restructure or liquidate banks as needed.”
| "All banks should be covered by the SSM, so as to have a level playing field and to support further integration of the industry" -Benoît Cœuré, ECB |
BaFin, the German regulator, doesn’t like that idea, as Euromoney noted last month. At the Thomson Reuters regulatory summit, Cœuré seemed to want to talk tough, sternly arguing the ECB’s position. “First, all banks should be covered by the SSM, so as to have a level playing field and to support further integration of the industry,” he said, while airily dismissing the concerns of the UK, Nordic and other non eurozone members of the EU. “Arrangements are being worked out on the basis of Article 127.6 of the Treaty to allow them to participate and be fairly involved in the decision-making process.”
However, having wrapped BaFin’s knuckles and confidently predicted that “the SSM will turn the ECB into the home supervisor of all euro-area banks”, Cœuré seemed to lose faith in his own conviction, quickly qualifying that: “Many supervisory tasks – probably most of them – should be undertaken by national supervisors. After all, most euro-area governors already fulfil supervisory responsibilities. However, this should be within a centralized decision-making process and according to a single handbook.”
It sounds a little half-hearted. And there are pragmatic reasons why. Mish points to the basic question of capacity constraints at the ECB. “According to the proposal, the ECB will become tasked with authorizing credit institutions, assessing acquisition and disposals of holdings, setting leverage and liquidity requirements, carrying out stress tests in addition to those of the EBA and national financial regulators, and monitoring and administering the resolution and recovery plans.
“Simply put, the creation of a supervisor to oversee more than 6,000 EU banks and manage over 20,000 existing supervisors in these endeavours is daunting.”
That the ECB is trying to screw up its courage to tackle all this emphasizes how proceeding with banking union has become an existential question for the central bank of the single currency zone.
Cœuré asserts, simply as a given, that an integrated European banking system – with banks freed from market worries over sovereign creditworthiness, and so funding at similar low rates – is essential for the transmission of a single monetary policy and so, inherently, a good thing.
He says: “In general, financial market integration allows the banking system and corporate debt markets to facilitate risk-sharing and efficient capital allocation across economies and, thereby, allow companies and households to reap the full benefits of freely mobile capital.”
However, the notion that capital was priced and allocated efficiently to its most productive users during the period before 2007, when all sovereigns and banks funded at similarly low levels, is scarcely borne out by experience. Rather, abundant cheap bank funding fuelled rampant property speculation, as it always does, and accumulation on bank balance sheets of ludicrous synthetic investments.
The consequence of the period of the single market’s greatest integration is that even the eurozone’s strongest economy, Germany, is sitting on a banking system full of rotten loans that its supervisors would rather encourage markets to pretend are not there.
One could equally point out that the eurozone economies are not integrated. Indeed, Cœuré admits that: “European economies face different economic and financial cycles and different types of systemic risk, and their financial sectors still exhibit different structural features.”
Why then was a single interest rate ever appropriate for them? Surely, a single base rate and tiny spread differentials fuelled the misallocation of capital on an enormous scale.
Meanwhile, the fragmentation of financial markets, which the ECB characterizes as an inherently bad thing, simply shows investors coming to their senses and recognizing that Spain is not Germany and Greece is not Finland. Similarly, national banking regulators are acting rationally by ring-fencing bank capital and funding inside national borders, even if this contradicts the idea of a single free market in capital, goods, services and labour.
The ECB wants to break the link between banks and sovereigns? It’s hard to see that ever happening until sovereign nation states cease to exist and we do head to a United States of Europe. Banking union is due to be established in law within a month and operational by the start of 2014. Good luck with that.
The ECB’s efforts to re-impose a single, very low interest rate through extraordinary measures, such as three-year LTROs and the promise of OMTs, have avoided an economic depression, as sovereigns rein in their budgets. However, even that effort can hardly be described as promoting the efficient allocation of capital, when it is really an emergency response that props up zombie banks and allows the ever-greening of non-performing loans.
