Single bells: single market, single currency, single supervisor, single resolution mechanism
On 12 of September, the European Commission (EC) has unveiled its proposal that shifts banking supervision to the European level, giving sweeping supervisory powers to the ECB.
Par Olena Havrylchyk
Billet
du 14 septembre 2012
Such decision is justified by the idea that we already have a single market and a single currency, so we need to continue the integration process by creating the European banking union with a single supervisor and a single resolution mechanism.
Will the current design of the banking union help to resolve the current crisis? It could. Will it prevent a future crisis? No.
The European banking crisis does not abate since 2008. The banking supervisors (national or supranational, like the EBA) have not succeeded to impose stringent stress-tests on the European banks that would reveal the full extent of their losses and the need for recapitalization. Such forbearance is dangerous but it is understandable. There is a fear that banks will not be able to find additional capital on the markets and, thus, would either require a serious government intervention or a wave of mergers. This might reinforce the already existing vicious cycle between the refinancing of banks and solvency of national governments. The creation of the banking union will break this link by allowing the EFSF/ESM to directly recapitalize the banks. Given the existence of such recapitalization possibility, a new wave of stress-tests should be more rigorous and credible. Thus, the banking union could stabilize the banking system in the short-run.
While the markets might be appeased in the short run, the current design of the banking union is not going to prevent a new crisis. The main reason for this is the inadequate financial regulation and the EC proposal does not address this issue at all. In fact, the current banking problems in most countries might have been prevented by more stringent national regulation on leverage and maturity of liabilities. Although Basel III imposes much higher capital requirements on banks, it changes little in the calculation of risk which will still be based on internal bank models subject to serious manipulations and malfunctions. Similarly, nothing is done to oblige commercial banks to diversify their investment in government debt, which would be a simple tool to diminish the link between solvency of banks and states.
The problems of moral hazard and too-big-to-fail are not addressed sufficiently by the proposal and market discipline could be further undermined if the banking union leads to new bank bail-outs. The current communication of the EC is not clear about a single resolution mechanism. In June 2012, the EC has published a framework for bank resolutions, according to which individual EU members must create ex-ante resolution funds and adopt common rules, but all this at the national level. It is not clear how this is going to be transformed into a single resolution mechanism, but in the absence of fiscal union, it is difficult to envisage a single European resolution fund or deposit insurance. In fact, it appears that a single supervisory mechanism is being proposed in order to justify the use of ESM funding. Once this money is used up, solvency of banks and states will be again interdependent and we will need a new round of negotiations and reforms. Single bells, single bells, single all the way…
Will the current design of the banking union help to resolve the current crisis? It could. Will it prevent a future crisis? No.
The European banking crisis does not abate since 2008. The banking supervisors (national or supranational, like the EBA) have not succeeded to impose stringent stress-tests on the European banks that would reveal the full extent of their losses and the need for recapitalization. Such forbearance is dangerous but it is understandable. There is a fear that banks will not be able to find additional capital on the markets and, thus, would either require a serious government intervention or a wave of mergers. This might reinforce the already existing vicious cycle between the refinancing of banks and solvency of national governments. The creation of the banking union will break this link by allowing the EFSF/ESM to directly recapitalize the banks. Given the existence of such recapitalization possibility, a new wave of stress-tests should be more rigorous and credible. Thus, the banking union could stabilize the banking system in the short-run.
While the markets might be appeased in the short run, the current design of the banking union is not going to prevent a new crisis. The main reason for this is the inadequate financial regulation and the EC proposal does not address this issue at all. In fact, the current banking problems in most countries might have been prevented by more stringent national regulation on leverage and maturity of liabilities. Although Basel III imposes much higher capital requirements on banks, it changes little in the calculation of risk which will still be based on internal bank models subject to serious manipulations and malfunctions. Similarly, nothing is done to oblige commercial banks to diversify their investment in government debt, which would be a simple tool to diminish the link between solvency of banks and states.
The problems of moral hazard and too-big-to-fail are not addressed sufficiently by the proposal and market discipline could be further undermined if the banking union leads to new bank bail-outs. The current communication of the EC is not clear about a single resolution mechanism. In June 2012, the EC has published a framework for bank resolutions, according to which individual EU members must create ex-ante resolution funds and adopt common rules, but all this at the national level. It is not clear how this is going to be transformed into a single resolution mechanism, but in the absence of fiscal union, it is difficult to envisage a single European resolution fund or deposit insurance. In fact, it appears that a single supervisory mechanism is being proposed in order to justify the use of ESM funding. Once this money is used up, solvency of banks and states will be again interdependent and we will need a new round of negotiations and reforms. Single bells, single bells, single all the way…
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