Wednesday, June 13, 2012

Banking union in the Eurozone and the EU

by Jacopo Carmassi, Carmine Di Noia and Stefano Micossi


June 13, 2012

Is Europe ready for a banking union? This column argues that the current debate is missing several key points. Chief among these is that much of what is needed for Europe’s financial system is already feasible within the existing set up.

The opportunities for institutional advancement in the EU created by the dismal management of the Eurozone crisis may well include the establishment of a banking union, a theme that could be placed on the agenda of the forthcoming European Council at the end of June. The debate on this topic, however, seems mired in confusion, notably as regards the features and tasks of deposit insurance at the Eurozone or EU level in combating contagion and restoring financial stability. It also seems at times to overlook the fact that many constituent elements of banking union are already present in the legislation in force or tabled for approval and, more importantly, that much of what is needed may be feasible with ordinary legislative procedures.

There is a need, to start with, to distinguish clearly what is needed to address a ‘systemic’ confidence crisis hitting the banking system – which is mainly or solely a Eurozone problem – and ‘fair weather’ arrangements to prevent individual bank crises and, when they occur, to manage them in an orderly fashion so as to minimise systemic spillovers and the cost to taxpayers, which is of concern for the entire EU. Much of the on-going debate on deposit insurance and banking resolution funds mainly refers to the latter issue; deposit insurance or resolution arrangements can be instrumental in confidence-building over the medium term but couldn’t ever have sufficient resources to meet a spreading run on deposits. More important, “using extended insurance coverage to stabilise financial systems in the absence of appropriate institutional, political, and fiscal conditions to address existing problems” would entail moral hazard (IADI 2012). Financial stabilisation in the short term is the proper task of lending of last resort by the central bank.


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