21st Mar 2018


Banking union's major omission: debt mutualisation

  • Germany has opposed debt mutualisation and watered down the banking union (Photo: EnvironmentBlog)

Should we fear another banking crisis in Europe? European leaders would have you think that this is not possible anymore.

Indeed, after intensely caffeinated negotiations that ran late into the night, the leaders of the eurozone emerged with a deal in hand and smiles on their faces, proclaiming that the long awaited compromise on a banking union has been reached.

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

Michel Barnier, the EU’s internal market commissioner quickly declared that the deal “will put an end to the era of massive bailouts”.

But will it?

The convoluted history behind Europe’s latest effort of achieving “an ever-closer union” can be traced back to the dark times of the financial crisis that rocked international markets half a decade ago. After the dust settled and some 110 banks caved under the weight of outstanding debts, the Union had already spent €1.6 trillion just to bail out its financial institutions.

With “never again” on their lips, Europe embarked on a grand project, conventionally called “the banking union”. In reality, it indicates a system of four major elements: a single rulebook for the financial market coupled a single supervisory and resolution mechanism, backed by an emergency fund.

The overarching idea was to preserve the European single market and break the noxious relationship between banks and its sovereigns.

Soon thereafter, tensions rose between major political stakeholders over how this new union should be achieved. Should it be a first step towards greater federalism or should it be simply a safety mechanism, controlled by national governments, meant only to address the single issue of banks’ solvency? On 20 March, the second option prevailed.

The compromise was clinched only after the German Finance Minister was woken up at 5am in order to sign off on key aspects. Under the deal, the Single Resolution Mechanism as it has been agreed will be responsible for supervising and/or shutting the 130 biggest eurozone banks as well as 200 cross-border banks and 6000 eurozone lenders.

The ECB, alongside a specialised agency, will undertake the regulatory supervision and will come to the rescue of troubled institutions by drawing from a €55 billion fund. Banks themselves will fill the funds’ coffers, through annual levies imposed by national governments. Under this deal, eurozone governments no longer have the final say whether a bank is too big to fail. It is up to the ECB to decide if funds are to be released.

Every country for itself

Fact: Italian banks have an estimated €150 billion worth of shaky, non-performing loans, while Europe prides itself with almost €1trillion. These figures are enough to give the shakes to any bank wanting to expand its lending business.

Fortunately, the European countries coming together under the banking union scheme can now act decisively and prevent another collapse of the system, right? Well, not quite. And I’m not referring just to the roughly 100 eurocrats that have to cast a formal vote on the closure of a bank.

The major fault of the system stems from German reluctance to accept debt mutualisation across the continent. This means that each country has to shoulder its banks using its own taxpayer money in case of a financial shock that overpowers the rescue fund’s existing capacity. And since the fund only has a few billions at its disposal, if major bank failures were to happen, the burden would once again fall back on individual countries. It doesn’t sound like a true banking union, does it?

The banking union was meant to reverse one of the most resilient financial laws, the so-called “financial trilemma”. In a nutshell, this triple dilemma is defined by three impossibilities: achieving financial stability, integration while maintaining national financial policies in an integrated market. Since the financial system is a dense web made up of streams of capital flows going from one node to the other, a faulty circuit can affect the entire market, threatening financial stability.

The watered down variant of the Single Resolution Mechanism that emerged in the wee hours of the morning of 20 March has severely weakened its initial purpose.

Investors are unsure about the health of banks’ balance sheets, the rigour of supervision and the capacity of cash-strapped European countries to provide the safety net needed to challenge the financial trilemma.

Although this is clearly a political victory for the European Parliament, which managed to force Germany’s hand into accepting a compromise, it is still a far cry from what Europe truly needed to turn around its wobbly banking sector. Like most rules coming from Brussels, the banking union is simply a jack-of-all-trades-master-of-none deal.

Robert Merton, an American sociologist, would have found the banking union a worthy inspiration for his studies. To illustrate how a false understanding of a given situation becomes an integral part of it and affects its outcome – otherwise known as a “self-fulfilling prophecy” – Merton used the parable of a fictitious bank run.

In his example, The Last National Bank, a profitable and stable institution, is suddenly affected by a false rumour that it was on the verge of insolvency. Panicked, its customers immediately flocked to take out their savings, overrunning the bank and forcing its default. The originally false definition of the situation – that the bank was insolvent – had become true, transforming into a self-fulfilling prophecy.

Like in Merton’s case, the EU’s banking union is geared in such a way that it automatically assumes that banks, maybe even big banks, will fail in the future. Unfortunately, the intricate decision-making mechanism and the limited scope of the fund are simply insufficient to reassure the market. Therefore, this is not a mechanism meant to help the banks that are now starving for cash, but a paradoxical way of instilling the idea, in both consumers and bankers, that a future liquidity crisis will happen.

This is a dangerous notion, which has the potential to act as an accelerant for future defaults.

Let’s just hope this will not turn into a self-fulfilling prophecy.

The writer is a Geneva-based economist.

Who pays the bills in a banking union?

The European Commission published the most important and eagerly awaited piece of the banking union puzzle on Wednesday but the backlash was predictable.

EU parliament gives final nod to banking union

MEPs on Tuesday signed off on the creation of a new authority and fund for failing banks – a missing element to the so-called banking union aimed at minimising the public cost of future financial crises.

'Denial' - is meat the new climate change?

The European Parliament's agriculture committee meets on Tuesday, with speculation that the EPP will vote against a report on the EU plant protein plan if it mentions switching away from animals to plant-based diets.

Moria refugee camp is no place for people

Two years on from the highly-controversial EU-Turkey deal, many thousands of refugees are still trapped on Greek islands. One of them offers an open invitation to EU leaders to see their inhospitable conditions at the Moria refugee camp on Lesbos.

Column / Brussels Bytes

EU e-privacy proposal risks breaking 'Internet of Things'

EU policymakers need to clarify that the e-privacy should not apply to most Internet of Things devices. The current proposal require explicit user consent in all cases - which is not practical.

News in Brief

  1. Separatist activist renounces Catalonia leadership candidacy
  2. EU puts conditions on Bayer-Monsanto merger
  3. Hard Brexit would hit poorer Irish households hardest
  4. Finland hosts secretive North Korean talks
  5. EU to unveil 3% tax on digital giants
  6. German elected S&D leader in European Parliament
  7. Germany: nearly €350m child benefit goes abroad
  8. Norway's far-right doubles support as minister resigns

Stakeholders' Highlights

  1. EUobserverStart a Career in EU Media. Apply Now to Become Our Next Sales Associate
  2. EUobserverHiring - Finance Officer With Accounting Degree or Experience - Apply Now!
  3. ECR GroupAn Opportunity to Help Shape a Better Future for Europe
  4. Counter BalanceControversial Turkish Azerbaijani Gas Pipeline Gets Major EU Loan
  5. World VisionSyria’s Children ‘At Risk of Never Fully Recovering', New Study Finds
  6. Macedonian Human Rights MovementMeets with US Congress Member to Denounce Anti-Macedonian Name Negotiations
  7. Martens CentreEuropean Defence Union: Time to Aim High?
  8. UNESDAWatch UNESDA’s President Toast Its 60th Anniversary Year
  9. AJC Transatlantic InstituteAJC Condemns MEP Ana Gomes’s Anti-Semitic Remark, Calls for Disciplinary Action
  10. EPSUEU Commissioners Deny 9.8 Million Workers Legal Minimum Standards on Information Rights
  11. ACCAAppropriate Risk Management is Crucial for Effective Strategic Leadership
  12. EPSUWill the Circular Economy be an Economy With no Workers?

Latest News

  1. Judicial reforms 'restore balance', Poland tells EU
  2. Whistleblower fears for life as US arrest Malta bank chair
  3. Behind the scenes at Monday's EU talks on Russia
  4. US yet to push on Nord Stream 2 sanctions
  5. EU mulls coercion to get refugee kids' fingerprints
  6. Five east European states prevent new CAP consensus
  7. EU to probe UK 'election-rigging' firm
  8. 'Denial' - is meat the new climate change?

Stakeholders' Highlights

  1. European Jewish CongressThe 2018 European Medal of Tolerance Goes to Prince Albert II of Monaco
  2. FiscalNoteGlobal Policy Trends: What to Watch in 2018
  3. Human Rights and Democracy NetworkPromoting Human Rights and Democracy in the Next Eu Multiannual Financial Framework
  4. Mission of China to the EUDigital Cooperation a Priority for China-EU Relations
  5. ECTACompetition must prevail in the quest for telecoms investment
  6. European Friends of ArmeniaTaking Stock of 30 Years of EU Policy on the Nagorno-Karabakh Conflict: How Can the EU Contribute to Peace?
  7. ILGA EuropeCongratulations Finland!
  8. UNICEFCyclone Season Looms Over 720,000 Rohingya Children in Myanmar & Bangladesh
  9. European Gaming & Betting AssociationEU Court: EU Commission Correct to Issue Guidelines for Online Gambling Services
  10. Mission of China to the EUChina Hopes for More Exchanges With Nordic, Baltic Countries
  11. Macedonian Human Rights MovementCondemns Facebook for Actively Promoting Anti-Macedonian Racism
  12. Nordic Council of MinistersGlobal Seed Vault: Gene Banks Gather to Celebrate 1 Million Seed Collections

Stakeholders' Highlights

  1. CECEIndustry Stakeholders Are Ready to Take the Lead in Digital Construction
  2. ILGA EuropeAnkara Ban on LGBTI Events Continues as Turkish Courts Reject NGO Appeals
  3. Aid & Trade LondonJoin Thousands of Stakeholders of the Global Aid Industry at Aid & Trade London
  4. Macedonian Human Rights MovementEuropean Free Alliance Joins MHRMI to End the Anti-Macedonian Name Negotiations
  5. Mission of China to the EUChina-EU Tourism Year to Promote Business and Mutual Ties
  6. European Jewish CongressAt “An End to Antisemitism!” Conference, Dr. Kantor Calls for Ambitious Solutions
  7. UNESDAA Year Ago UNESDA Members Pledged to Reduce Added Sugars in Soft Drinks by 10%
  8. International Partnership for Human RightsUzbekistan: Investigate Torture of Journalist
  9. UNICEFExecutive Director's Committment to Tackling Sexual Exploitation and Abuse of Children
  10. Nordic Council of MinistersState of the Nordic Region 2018: Facts, Figures and Rankings of the 74 Regions
  11. Mission of China to the EUDigital Economy Shaping China's Future, Over 30% of GDP
  12. Macedonian Human Rights MovementSuing the Governments of Macedonia and Greece for Changing Macedonia's Name