To put it kindly, there is a phrase for it: the audacity of hope. Before the European Commission’s banking-union proposals threw a spanner in the works, policymakers had hoped the European Central Bank (ECB) by January 2013 would be bestowed extensive prudential supervisory powers for euro-area banks, at first, for those receiving European Stability Mechanism (ESM) assistance.
However, buttressed by German scepticism, a rift has emerged over the power of the ECB relative to national authorities, the jurisdiction of the European Banking Authority (EBA) and the designation of crisis-management powers. In summary, the banking-union plan will “be less ambitious and less rapid” than initially envisaged, reckon Deutsche Bank analysts, echoing market consensus.
In DB’s words, here are the key elements of the Commission’s proposals:
|
The banking-union objective is caught between competing aims, according to analysts. Some see the objective as a means to craft a stable institutional financial framework for the euro-area, along with better fiscal co-ordination, and others who see the objective in narrower terms “in the context of the debate about direct ESM assistance to individual banks, which necessitates taking banking supervision for those banks out of the hands of national authorities and transferring it to the EU-level”, according to Deutsche.
The other ideological stumbling block remains the aim for a single market for financial services. As DB analysts put it:
| “The relative importance of either objective will have a bearing on the institutional design of banking union: stressing the latter objective would put an emphasis on a strong role for EBA to ensure the consistency of rules and supervision in the EU-27 and would argue for an open architecture and weaker role of the ECB, whereas emphasis on the former objective would give the ECB a prominent role and strive to integrate crisis-management systems at the EU level.” |
German public-sector banks and co-operative institutions wield extensive political influence, a fact that has delayed the industry’s consolidation. In this context, analysts reckon these institutions are likely to be successful in repelling EU-level supervision. Here’s a round-up of Germany’s wish-list, again courtesy of DB:
|
The timely creation of a banking union of sorts could engender optimism about the institutional shift towards political and fiscal union, suggesting a structural shift in crisis management/prevention is possible. In the short-term, the banking-union plan should reduce the risk of over-zealous national supervisors promoting home-bias by reducing the fungibility of liquidity and capital buffers for cross-border banks. In this context, giving the ECB prudential supervisory powers makes eminent sense since it reduces the risk of regulatory abitrage. However, in the short term, it is hard to see how a banking union of sorts can halt financial fragmentation within the eurozone as capital-constrained banks re-assess their cross-border business models and investors re-assess the theory of eurozone convergence.
In sum, here's DB’s bearish conclusion:
| "Banking union will remain a torso: instead of a consistent, integrated design, a half-baked system will be established that leaves out crisis-management instruments – ignoring that supervision and crisis management are inextricably linked. |