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Deutsche Welle Bernd Riegert

Opinion: Banking union

Bernd Riegert / jrb
December 19, 2013

The banking union is a typical European compromise: It sounds good in theory but no one really knows how it will work in practice. DW’s Brussels correspondent Bernd Riegert sees problems on the horizon.


European Union member states have now agreed to establish a banking union, and their finance ministers couldn't be happier.

But should squeezed taxpayers and battered savers also cheer about having to no longer pick up the tab for future bank crises? No, because the banking union is only a building block to cope with future failures. There's no guarantee that governments and ultimately taxpayers won't end up covering the costs.

Measures to battle the current financial crisis have devoured nearly 1.6 trillion euros of taxpayers' money so far. In a similarly sized crisis, the banking union would be tiny, with its modest settlement fund of 55 billion euros. In any case, national budgets would still have to be tapped and possibly also the European Stability Mechanism (ESM), which holds at least 500 billion euros of firepower.

The banking union only makes sense if it can prevent future financial crises. That means risks need to be detected earlier through consistent, independent oversight of systemic, large banks. Closing ailing banks also need to be managed faster than is the case today. By the end of 2026, a common fund financed by the banks themselves should serve as the final lifeline. And banks' owners and creditors will need to accept greater liability for risks.

Safeguards against future crises

Before the European Central Bank assumes direct responsibility for the supervision of 128 large banks and indirect responsibility of 6,000 additional banks in November 2014, the finance ministers have ordered a stress test for the large banks. The reason: banks' books show accumulated bad debts of nearly 1 trillion euros, according to estimates by the consulting firm Ernst and Young. That means some banks will need more equity to classify for supervision and the planned banking union.

Who pays when a bank fails the stress test remained a contentious point right up to the last minute. In the end, the states - and ultimately taxpayers - will shoulder the load. If a member state should be unable to pay, it can borrow money from the ESM under strict conditions. German Finance Minister Wolfgang Schäuble successfully prevented a direct reach into the rescue fund. And a pooling of outstanding commitments is also banned.

The message that owners of banks will bleed in the future may strike a popular cord with the public but, in the end, everyone will pay as taxpayers. Many failing banks are owned by governments and thus by their taxpayers. When, for instance, a state bank in Germany owned by a state government has to be closed, guess where the required funds come from. In Slovenia, meanwhile, the state owns all ailing banks.

Massive ECB support

Currently, the ECB is keeping Europe's banking system in tact with massive money injections and interest rates at nearly zero percent. So failing banks, especially in southern Europe, are still able to operate. But bank loans to industry remain sluggish.

In the end, taxpayers and savers are also financing this crisis, since rates that are lower than the inflation rate lead to a slow but steady expropriation of investors. Put another way, money in our accounts is losing value by the day. Our life insurance policies and pensions are also worth less. And the banking union won't change that.

The ideal scenario is for the banking union never to have to close a bank. That's also what ECB President Mario Draghi would like to see, since he knows all too well how complex the decision-making process is in closing a bank. It not only involves the banking union chairman and a general assembly of 300 members, but the European Commission and the Council of Finance Ministers also have veto rights. And when a bank needs to be closed, this needs to happen quickly to avoid panic among account holders, investors and financial markets.

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