03 June 2012

Wolfgang Münchau: A real banking union can save the eurozone

Unlike six months ago, officials now realise there is no alternative to a banking union, comments Münchau in his FT column. The biggest danger now is that eurozone leaders change their minds.

A banking union would need to include four centralised components: a resolution and recapitalisation fund; a fund for joint deposit insurance; a central regulator; and a central supervising power.

In addition, the two funds – one for recapitalisation and one for insurance – need to be appropriately financed. A bank resolution facility should be backed by a commitment of, say, €1 trillion, which will eventually have to be funded by a joint and several debt security – a eurozone bond. To kick-start this process, one could use the existing rescue umbrella, but this can only be a temporary solution.

The deposit insurance should have no limits. It is probably best to anchor it at the ECB itself – which would be justifiable if and when the bank recapitalisation facility was big enough. Its goal should be to stop the two types of bank run we are seeing right now. The first is sectoral: a run on weak banks, with money routed to strong banks. The second is geographic: a run on banks in weak peripheral countries, with money routed to core countries. In other words, the deposit insurance not only needs to insure deposits, but the euro value of the deposit even if the country leaves.

Both schemes require deep institutional change. A joint recapitalisation fund needs a central supervisor with the courage and power to walk into a Spanish bank and close it down. Deposit insurance must be accompanied by a deep political union. Otherwise, it might create moral hazard by encouraging countries to leave the eurozone in safe knowledge of this guarantee. Without a commitment to further political union, deposit insurance is either ineffective or ruinous. Recapitalisation, insurance and joint supervision therefore go together.

So, a proper banking union is a very big deal indeed. It would be the biggest component of any future fiscal union. But I am not sure that everybody is on the same wavelength. As ever, one should never underestimate the willingness of European politicians to attempt a fudge if they cannot reach a compromise, and pass it off as a historic agreement. To say otherwise would be a triumph of hope over experience.

But at least I have that hope. Unlike six months ago, officials now realise there is no alternative to a banking union. The biggest danger now is that eurozone leaders change their minds. Ms Merkel has not made the case back home. A proper banking union would come as a shock to many Germans, including those in the media. It is still easier to be a pessimist, but I am not yet quite ready to give up what will probably be the last chance to save the euro.

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