A division into larger and smaller banks makes no economic sense, comments Münchau in his FT column.
If you study the details of what was agreed last week, the substance evaporates. The common supervisory structure will affect only about 100 to 150 banks out of a total of 6,000 – those with assets of more than €30 billion. The ECB can usurp supervisory powers from national regulators but the rules of engagement are not clear. Wolfgang Schäuble, the German finance minister, said when he left the meeting that the ECB would need to make a well-argued case. But it is not clear how this would work in practice... The €30 billion will become a kind of target to circumvent. The practical outcome of this agreement will be a two-tier banking system, one for large banks, one for small banks.
So how is such a fractured two-tier banking union without an effective resolution system going to work? My guess is it will work through forbearance. The ECB will deal with failing banks just as the Eurogroup has been dealing with failing states. It will replace existing debt with new debt, and impose conditions. And just as the eurozone will never allow one of its members to default, the ECB will never close down a bank. Bank resolution thus becomes a euphemism for exactly the opposite.
So this will be about the pretence of resolution, not real resolution. There is a parallel with the ECB’s programme of outright monetary transactions. This was intended to provide temporary support to sovereign bond markets, but it has not yet been triggered, and may never be. Its main purpose was to send a signal that the ECB accepts the role of buyer of last resort – even if it never buys. The role of the OMT and the banking union is to keep up appearances.
When Mario Draghi, the ECB president, announced the OMT, the consensus was that it would give governments time to put the policies and institutional changes in place. What happened was that the OMT has killed any appetite for a fiscal union, and has turned the banking union into a phantom.
The effect of the OMT will be negative in the long run because it has provided policy-makers with a false sense of security. That was not the intention but the effect. When the crisis returns, as I expect, in 2013, Mr Draghi will be on his own, responsible for failing banks, failing states and a depression in the periphery. I am intrigued to see how he is going to do that.
© Financial Times
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