There are six elements to a genuine banking union agreement:
- A joint depository insurance scheme
- Mandatory participation by all banks
- A set of rules applicable to all the banks
- 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; i.e. resolution authority
In my post a few weeks ago, “Banking Union is a Pipe Dream,” I wrote
If the EU tells you next month that it has a banking union, consult the list above. The agreement must include plans for each of those six points. If they fudge any of them, then you may have a face saving agreement or some other type of political statement, but you do not have a banking union.
The most important points are #1 and #6, because lots of money must be guaranteed by the FANG countries, particularly Germany. At this juncture, there has been no agreement to pay for a deposit insurance and resolution authority.
Merkel could be biding her time until after elections, when she will be able to guarantee a few trillion dollars without voter backlash, but there is also the possibility that Germany and the rest of the FANG will never become joint and severally liable with their poorer cousins. Only time will tell.
While the type of institution to be regulated has been agreed upon, this point has been severely watered down. Only very large banks will fall under central regulation through the ECB with national regulators continuing to supervise smaller institutions.
This is a mistake. The small banks, whether they be American S&Ls, Spanish cajas or German sparkassen, or often the banks that wind up in trouble. To mollify critics, the ECB can step in to supervise smaller, problematic banks; however, the decision to oversee these banks will now be political. This is a huge loophole.
Point #5 is very much in doubt. There is still no way to allow countries outside the eurozone to participate. Borg, the Swedish finance minister, is correct in averring that the adoption of the banking union in this form will lead to two-speed EU where non-eurozone members are increasingly isolated.
In order to get the U.K., Sweden, Denmark, Poland and other non-eurozone countries on-board, the ECB should not be used as the regulator. A new body could be created with an abbreviation starting with the letter “E.” It is telling that the other countries are ignoring this route.
While the finance ministers will announce that there is a banking union and the journalists will repeat the announcement with no critical analysis, what we have is a face-saving agreement designed to kick the can down the road another time.