Germany has been dragging its feet for quite some time on the EU’s proposed banking union. During the June euro summit that was to fix everything, the Germans made several agreements from which they have been backing away from ever since.
The two main agreements reached during the summit were a declaration to commence a full banking union by the beginning of 2013 and a Spanish bank recapitalization directly from the ESM so Spain would not add to its debt.
In September, Germany changed its mind and has made sure that Spain is on the hook for bailing out its insolvent banking sector. Then, during October, the Germans began raising myriad objections to the banking union.
The latest controversy revolves on around Germany’s insistence that the ECB not being allowed to have final say on the supervision of most banks. Schaeuble wants to maintain a wall between supervision and monetary policy. The ECB has been pegged as the central supervisor of the banking union ever since negotiations began in July, so the French are quite peeved at the sudden change.
Maria Fetker, the Austrian finance minister, attempts to spin this change in position by the FANG countries by stating that the original plan did not envision the ECB to be the central regulator of banks but rather involved in regulating the banks. Since the ECB is currently involved in regulating banks, Ms. Fetker’s statement is nonsense.
The Reuters article states that common banking supervision is the first pillar of a banking union, but it is not. The first pillar, that is the most important part of the agreement, is the money. These countries must agree to become jointly and severally liable for the deposits and bad loans of each others banking systems.
The PIIGS and France have no problem with this element, because they will not be the ones paying. It is the FANG countries who will be on the hook for trillions in deposits in the PIIGS. Furthermore, the PIIGS already have many insolvent institutions that are just waiting to be bailed out, and the FANG countries simply cannot afford to bail these out.
Germany will follow one of two paths. Either it will allow a dramatically watered-down banking union where it does not have to pay for anything or it will offer its purse in exchange for draconian concessions, perhaps a wind-down of all insolvent banks in the eurozone before the banking union may take effect.
I do not see the FANG countries agreeing to be jointly and severally liable for PIIGS debts, so bank on the first option but hedge the second. Remember, if you do not see these six elements, you do not have a banking union:
- A joint depository insurance scheme
- The type of institution to be regulated
- A set of rules
- An implementation schedule
- A way to legally allow countries outside the eurozone to participate in an ECB-led banking union
- A plan to deal with banks that are already in trouble or have been bailed out.