08 February 2013

Reuters: Cracks appear in European banking union scheme

Setting up a fund and agency that, where needed, would shut weak banks - known as 'resolution' - is central to this ECB-led union because it would remove the onus on countries like Ireland to save failing banks alone, running up bills that overwhelm the state. Yet the political drive to complete banking union is waning, with the reluctance of Germany and other economically-strong countries to put themselves on the line for bad loans made in Spain and elsewhere coming back to the fore.

ECB President Mario Draghi stressed this week how important a move from a "purely national to a supra-national resolution mechanism" was, because many eurozone banks are operating extensively across borders. ECB Executive Board member Benoît Cœuré called for EU countries to set up a joint bank resolution mechanism promptly, saying: "2013 will be a key year for Europe to make progress with this second leg of the banking union". The remarks underscore growing unease about the political resolve to build on an agreement among EU finance ministers last December that created the ECB watchdog.

For ECB supervision to work, it needs to be able to identify failed banks. Yet, without a resolution fund to pay for a clean-up, it would be difficult if not impossible for Frankfurt to name such weaklings publicly. It puts the bank in an uncomfortable position. As supervisor, the ECB had hoped to reassert order on the sector, by demanding, for example, the closure of weak banks dependent on its support. Without a back-up scheme to cover the costs of shutting such banks, this will be all but impossible.

The scaling back of banking union, firstly by removing a pillar for deposit protection and with a question mark now over the means to tackle failed banks, means that ECB supervision may be the only element left, at least at the outset.

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