|
|
Such an institution needs a fiscal backstop and the ESM should provide one. But this would not create eurobonds – the very need for eurobonds might to some extent disappear with a strong banking union.
A long-term reform agenda…
The lesson of this crisis is that a stable Single European Market in banking is not possible with national supervision, something also referred to as the financial trilemma. One could of course argue that the problems of Spain (and Ireland) are due to local banks engaging in a classic real estate lending binge. This is true, but the problem would only remain local if the failure of mid-sized local banks did not endanger the stability of the entire eurozone banking system. Large, cross-border Spanish banks and indeed banks elsewhere have considerable exposure to these banks (and the Spanish economy in general). Failures of the Spanish local banks could thus set in motion a domino chain affecting the entire eurozone banking system. In addition, national supervision of cross-border banks gives rise to distortions... since home-country supervisors might intervene in a weak bank too early or too late. Finally, the recent experience across Europe has shown political and regulatory capture of national supervisors resulting in underestimates of losses and delayed intervention.
The authors [Thorsten Beck, Daniel Gros, Dirk Schoenmaker] have therefore – in different combinations and with different co-authors – repeatedly called for a supranational framework for the supervision of large pan-European banks. While different institutional solutions are possible, a European-level framework for deposit insurance and bank resolution is critical in order to enable swift and effective intervention into failing (cross-border) banks, reduce uncertainty, and strengthen market discipline. Critically, a central resolution authority needs the necessary resources to resolve large cross-border banks in an efficient manner. That is why a combination of the resolution authority with a deposit insurance scheme for cross-border banks might be necessary. Industry-based funding for such a scheme is also called for to reduce concerns of moral hazard, where the downside risk of banks’ risk-taking is borne by taxpayers. Since deposit insurance, even if financed by banks themselves, always faces limitations in case of systemic bank failure, however, a back-stop by national governments, possibly through a European institution, such as the EFSF and the new ESM, is necessary. This is especially important in the early phases as the fund is being built up.
A European Resolution Authority
To turn the European banking system from a source of fragility into a source of strength, the authors argue for bold steps and a stop to forbearance.