Monday, April 30, 2012

Is a federal banking system necessary for the EU?

In his column, the Telegraph's Jeremy Warner looks at the possibility of a federal banking system for the EU and concludes that it is a political impossibility.

Regular readers know that your humble blogger doesn't think that a federal banking system is necessary for the EU but rather that the EU should adopt two elements of a federal banking system.

First, a common deposit insurance mechanism.

Specifically, I think that the EU should dedicate 100% of the remaining funds in the European Financial Stability Fund and the European Stability Mechanism to backstopping the sovereign deposit guarantees.

As I predicted, so long as there is concern over the ability of the sovereign to perform on its deposit guarantee, there will be an on-going bank run from these countries.  The huge credit building up at the German central bank with the central banks of the 'Club-Med' countries is confirmation that this prediction was accurate.

Reinforcing the deposit guarantee is important as it will stop the run on the banks going on in the EU countries with shaky sovereign financing.

Second, ultra transparency as a common disclosure requirement.

By requiring every bank in the EU to disclose on an on-going basis its current asset, liability and off-balance sheet exposure details, it brings all the banks under common supervision.  Common supervision provided by the market.

This supervision by the market is important as it is not subject to gaming for the benefit of individual countries.

The latest crackpot idea for shoring up Europe's monetary union, much discussed at last week's spring meeting of the International Monetary Fund and now widely promoted by eurocrats, is the establishment of a federal banking system, with a single framework for regulation, bailouts, deposit insurance, supervision and resolution.... 
If Irish, or indeed Spanish banks, had been regarded as a mutual ward of all eurozone nations, neither economy would today be in quite the same mess as it is, where the sovereign has effectively been overwhelmed by the hubristic expansionism of its banks. 
So why do I say that the formation of a federal banking system in euroland is another crackpot idea? It's because as things stand, there is virtually no chance of it happening. 
To the contrary, all the pressures right now seem to be the other way around, towards disintegration of the eurozone banking system rather than further integration. It is as if in progressively retreating behind national borders, finance is subconsciously preparing for the eventual break-up of the euro back into its constituent sovereign currencies....
Full mutualisation of banking assets and liabilities under a federal banking system would plainly take us some way further towards a lasting solution, but nowhere in the eurozone is such a framework thought remotely acceptable. 
This is because national banking systems are still seen as an important conduit for the economic and industrial policies of individual sovereign governments. No one is going to surrender these levers to the "greater good" intentions of some unaccountable eurocrat. 
In France, the major banks are so much a creature of government that they might as well be regarded as one and the same thing. In Germany, too, the banking system is unashamedly used for the pursuit of perceived industrial advantage.

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