Cosmetic, Can-Kicking Banking Union Agreement in Play

With Germany onside, EU nears banking union deal | Reuters.

There are six elements to a genuine banking union agreement:

1. A joint depository insurance scheme
2. Mandatory participation by all banks
3. A set of rules applicable to all the banks
4. An implementation schedule
5. A way to legally allow countries outside the eurozone to participate in an ECB-led banking union.
6. 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.

Negotiations Ongoing on Euro Banking Union

 

Germans Will Not Pay for Banking Union

Franco-German rift threatens plan for banking union | Reuters.

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:

1. A joint depository insurance scheme
2. The type of institution to be regulated
3. A set of rules
4. An implementation schedule
5. A way to legally allow countries outside the eurozone to participate in an ECB-led banking union
6. A plan to deal with banks that are already in trouble or have been bailed out.

No Agreements on Euro Banking Union

Negotiations Ongoing on Euro Banking Union

EU Nations Clash on Thresholds for Direct ECB Oversight – Bloomberg

The EU is arguing amongst themselves over what kind of institution will be subject to ECB oversight. There are two ways to determine this with varying levels subjecting the bank to ECB oversight, the size of the institution, €2.5bn, €20bn or €60, or the size of the institution relative to the host country’s GDP, 20%, 50% or 75%.

Regardless of those thresholds, ECB oversight automatically applies to any bank with a cross-border presence, but the ECB will use the national regulators to do most of the work. The ECB retains a panic button whereby it can usurp the national regulator’s authority at any time and directly supervise a bank whether or not it meets the foregoing criteria.

This is all very interesting. Why would everyone be arguing about the size of bank to be regulated when the “cross-border presence” and the panic button allow the ECB to supervise any bank it wishes? It’s because the rules will be cleverly crafted so that favored institutions fall outside the ECB’s supervision.

The ECB is ruled by a committee where all 17 countries have a vote. This means that there will be horse-trading and that no country will have to allow the ECB to regulate an institution by collecting enough votes to maintain national authority over an institution. This will quickly devolve into Johan not regulating Jean’s banks, tit for tat.

These are the six elements for a banking union:

1. A joint depository insurance scheme
2. The type of institution to be regulated
3. A set of rules
4. An implementation schedule
5. A way to legally allow countries outside the eurozone to participate in an ECB-led banking union
6. A plan to deal with banks that are already in trouble or have been bailed out.

No Agreements on Euro Banking Union

So far, it appears that #2 is being negatively compromised. Look for elements #2 -5 to be negotiated for as long as possible, because the real sticking points are #1 and #6. These points will take German money to implement, lots of it.

Undoubtedly, the negotiations will show just enough progress to enable more can-kicking, but, remember— there is no banking union unless there are concrete steps to implement the elements above. There should be a joint depository insurance plan with money not lines of credit, all institutions should be regulated, strict rules issued and enforced by the ECB, an implementation schedule, money to deal with banks already in trouble and a way for all EU countries to legally participate.

Banking Union is a Pipe Dream

Divisions overshadow Europe’s plan to control banks | Reuters.

Last month, I wrote that no matter what the politicians say there is no banking union unless all of the countries agree to

1. A joint depository insurance scheme
2. The type of institution to be regulated
3. A set of rules
4. An implementation schedule
5. A way to legally allow countries outside the eurozone to participate in an ECB-led banking union
6. A plan to deal with banks that are already in trouble or have been bailed out.

No Agreements on Euro Banking Union

It seems that #5 is proving to be a sticking point. A treaty change will be necessary to allow countries not using the euro to participate in the banking union. Treaty changes are arduous and take years, so this banking union will not occur on the accelerated timetable desired by the periphery and France.

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.