06 January 2015

Wall Street Journal: Eurozone banking union still on uneven ground

The head of the eurozone’s new single bank supervisor, Nouy will set the standards that will govern Europe’s banking system. This, in turn, will influence the durability of the eurozone itself - an important issue given renewed fears about Greece.

The single regulatory arrangement was designed to help Europe escape destructive links between struggling banks and weak governments that helped fuel the eurozone crisis just a few years ago. It is the first step in a banking union that is easier politically than full fiscal union.

This could help ease future financial-system strains. But investors shouldn’t view it as a silver bullet - political complications, which hamper a eurozone-wide deposit insurance fund, could also curtail Nouy’s ability to make banks more resilient.

The new banking watchdog must implement uniform operational and capital standards for banks - especially in weaker countries where retail depositors will trust less in nationally backed deposit-insurance schemes. Last summer’s review of bank asset quality and stress tests began that process; now the regulator must root out low quality capital and harmonize risk weightings for similar assets across different countries.

Tighter standards should help prevent future crises, while also giving investors and lenders more certainty that banks in different countries will succeed or fail in similar ways - and that they will get the same resolution treatment whether in Germany or Greece.

But tough action, which would entail forcing some banks to raise capital, cut lending or raise loans costs, would hurt economic competitiveness for countries with weaker banking systems. And that will take Nouy into a political minefield.

Full article on Wall Street Journal (subscription required)

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