The Detailed Roadmap to a Financial and Banking Union

The Euro Treasury Bill Fund (#BishopBills) was compared with other ideas by the New York Times recently - see article

Many key steps to a political union of the euro area states are already in place - and even a substantive 'fiscal union' seems to be on offer from Germany:

Membership of the European Union itself; the 'six-pack' on economic governance, and
Imminently: agreement on the 'two pack'; entry into force of the European Stability Mechanism (ESM); and entry into force of the Treaty on Stability, Co-ordination and Governance (TSCG).

Even the existing elements of political union must be complemented now by an appropriate binding together of the financial and banking systems of euro area members to create 'more Europe'. Many observers call for the immediate 'mutualisation' of euro area debt as a part of a route towards – rather than after - greater integration. Would that be sensible? Is it even credible in advance of a profound deepening? After further, careful analysis, this author’s conclusion is No. But the precedents for limited pro rata guarantees before a deep fiscal union are compelling. At the least, guarantors are entitled to require that borrowing plans are collectively approved in advance (implying that borrowings outside that approval would not be legally enforceable) so that governments can account to their Parliaments and peoples for known commitments.

At the meeting of the Heads of State or Government (HOSGs) on June 28/29, they should agree the roadmap of actions to implement the following:

Set up a temporary euro Treasury Bill Fund with pro rata liability enhanced with aspects of the EFSF’s Over-Guarantee system and with the ESM effectively functioning as the first loss-buffer. It would come into operation only after the TSCG and `two pack’ are in force, so ensuring the economic governance component of the political union is functioning. Given the existing €2.2 trillion of euro area pro rata guaranteed obligations (deposits at the ECB, the EFSF and the ESM), the theoretical cap on the Fund would be about the same. The Fund should be a direct substitute for deposits at the ECB, and drawings on the ESM would be used first to pay off obligations to the Treasury Bill Fund. So the euro area’s genuine risk of loss would not increase as a result of the Fund, as any losses would crystallise within the ESM. In practice, the risk of loss should even reduce as the ECB’s exposure to banks is replaced with the Fund’s exposure to sovereigns.
Create the status of a `European Bank’ that must – but only - include all banks capable of spreading cross-border contagion within the euro area. The prudential supervision of these banks would be undertaken by the ECB. Correspondingly, the ECB would be able to request the ESM to adopt the power to backstop a dedicated, pre-funded Deposit Guarantee Scheme and Resolution Fund for these `European Banks’ until a sufficient sized fund had been accumulated by them. Such banks would be subject to special regulation limiting `large exposures’ to national public debt, opening the way to holding liquid `European debt’ such as the Treasury Bill Fund.

Graham Bishop, 25th June, 2012

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