The European banking union should be more European integrated


Against – Pieter Lakeman

The European banking union has no positive effect on the economy in the Euro zone

All banks located in the Member States of the European Monetary Union will soon be under joint supervision. This supervision will be exercised by the European Central Bank. The board of the ECB comprises representatives of national central banks, some of who had seriously failed in their national surveillance in the period prior to the credit crisis. Initially, the aim of the European banking union was to prevent Member States from paying big amounts to keep banks afloat. The banks from the euro group will soon be subjected to a stress test to see whether they are financially sound. An unqualified audit report apparently does not ring a bell at the ECB. The requirements and assumptions of the stress tests are not public just like previously carried out stress tests. Some approved banks failed short after this previous stress test though. The new test would be heavier than the last test. If the banks do not satisfy the 4.5% capital requirement, Member States are requested to offset the deficit before the banking union will come into force. Even when banks do not pass the test, the reserves have to be increased to the level of 4.5%. Depositing afterwards is replaced by depositing in advance.

Which funds will save distressed banks afterwards? First, the European Stability Mechanism (ESM). That was initially founded as a permanent funding program for the salvation of Member States of the European Union who were in difficulty and would contain €500 billion, which would be provided initially by the Member States themselves. In 2012 it was decided that also banks could borrow money from this funding program. With that, the initial purpose of the banking union was left behind. It was also decided to allocate €60 billion from the ESM to recapitalize banks with equity shortage.

How do these proposals affect credit granting? At first glance you might think that the funding of the banking can be easier and fractionally cheaper. Yet that is not likely, because lower interest rates than 0.5% or 1% at the ECB are not conceivable. More important, it seems that through the support guarantees at European level, the mutual trust of banks recovers. This effect will be small though because the mutual trust of banks almost returned to its old level in 2014 (it dropped after the collapse of Lehman Brothers in 2008).

The main consequence of the introduction of the European banking union will be that the behaviour of bank managers (often referred to as bankers) will be riskier. After all, with the new financial cushion banks bear less risk of bankruptcy and respective managers also bear less risk on personal liabilities. The positive effect of the European banking union must be located in the more flexible or easier granting of loans to firms. However, banks will not do that. They did not do that when they could borrow at 0.5% of 1% at the ECB either.  Nonetheless, more money will be invested in riskier activities and perhaps this will be an incentive for the creation of new bubbles.

Both of these phenomena, however, do not lead to real economic growth. By establishing the banking union, at least in the form as it is now grown, granting loans to firms will not increase. Economic growth will therefore not increase.
In favour – Harry Geels

Banking union? Yes, but only if Europe has to become one.

There were many complaints about the deal Europe made with Cyprus – especially by the Cypriots themselves and by the (foreign) savers there – the foundation of the chosen solution was not right: not just the investors in the banks but also the larger savers (those with more than €100.000 savings) should help pay. The Cyprus precedent makes perfectly clear that saving is not save and that in fact we already have a banking union.

Saving is much riskier than many of us realize. It is not so much different from lending money to a risky business. Indeed, banking activities as they occur at most banks, are similar to those of hedge funds: they both work with leverage. The reason why saving is still regarded as generally save, has to do with the deposit guarantee scheme, which protects savings up to a certain amount. Banks would have to arrange this with each other (after all this guarantee scheme leads to cheap savings banks could benefit from). After SNS and Cyprus, however, we know that the taxpayer and not the banks bears the deposit guarantee scheme.

To keep Cyprus and the (downsized) banking sector alive through money coming from the emergency fund (hence, taxpayers money) de facto means having an European banking union. Namely, one of the main characteristics of a banking union is a common deposit guarantee scheme. In Europe, the banking crisis and Cyprus were the starting point of the theory that a banking union should form an integral and key part of the euro system. Just as it should be the case for a political and fiscal union, according to the politics.

With some tricks (democratic principles are regularly thrown overboard) Europe as a super state is launched. Otherwise the Euro as a ‘one size fits all’-currency can not survive, according to the politics. The European unification is inextricable linked to the survival of the Euro. That unification includes a banking union, where the banks vouch for all European savers up to a certain amount too.

Note that a banking union is not, or only slightly, necessary if we would organize the Euro system in a different way, for example with The Matheo Solutions (TMS), a euro solution that because of a lack of space can not be covered here unfortunately. If the undemocratic moves towards further European integration and political union will continue, the question how the banking union must be regulated remains.  In my view, a banking union includes a separation of commercial and investment banking (two separate worlds that may not infect each other) and a lower amount of protection for depositors.

A ‘guarantee’ of €100.000 per person is too high to ensure without tax money.  If it really fails – some big banks would fail for example – the other banks will not be able to pay the money. Furthermore, not-euro countries that are part of the EU should joint the banking union too.

The current problem is the imbalance in Europe, particularly in the Euro zone. Stronger countries like the Netherlands, Germany and Finland are the minority (in number of inhabitants, their share of total European politics and the ECB) against the weak countries. When the UK, Sweden and Denmark also join, the balance between north and south would be restored.

This article is translated in English by the editors of Faces.