Saturday, July 7, 2012

An incomplete step towards a Banking Union

by Daniel Gros


July 7, 2012

The EZ crisis – born as a debt crisis (Greece) – has grown up into a banking crisis (Ireland, Cyprus, Spain, ...). This column argues that Spain is symptomatic of larger banking problems, so the EU Summit decisions on banking union are welcome and critical to any long-term solution. Yet someone must pay for Spanish bank losses. Spanish politics is shielding Spanish creditors, European politics is shielding EZ taxpayers, so the Spanish government will pay – and in doing so may go the way of Ireland. This crisis is far from over.

Banks were “international in life, but national in death” in the first couple years of the Global Crisis. Large, internationally-engaged banks had to be rescued by their home government country despite the rescue being in the interest of many nations.

How times change. European banks are now “national in life, but European in death”. In Spain, for example, the banks’ problems were all national – local savings banks (cajas) financed a huge real estate boom. As the boom turned to bust and the losses threaten to overwhelm the capacity of the Spanish state, the problem became European. An Irish-like failure of Spain triggered by a collapse of its banks would threaten the euro’s very survival and this core economic interest of all EZ members (De Grauwe 2012).

The Spanish case is symptomatic of a larger problem.
  • National supervisors have always a tendency to minimize problems on their own turf.
In the case of large international banking groups the instinct (and the bureaucratic self-interest) of the home country supervisor is to defend the ‘national champion’ abroad. But the resistance of national supervisor to recognize problems at home is even stronger.

This tendency was very much in operation in Spain. Until very recently, Spanish authorities maintained that the real estate problems were temporary.
  • Spanish banking regulators did not want to own up to the reality that they had, for more than 10 years, been engaged in oversight – in both senses of the word.
The tragic sense of the word is that they overlooked the build-up of a huge construction boom whose bust now threatens to bankrupt the entire nation.

The Irish case was not much different to start with. When the problems started to surface, the Finance Minister first claimed that this would become “the cheapest bank rescue ever”.


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