A Page for the History Books: Brussels Pushes Forward with EU Banking Union

By Martin Hesse, Christoph Pauly and Christian Reiermann

On Wednesday, European Commission President José Manuel Barroso is expected to unveil his plans for a unified banking supervisory system led by the European Central Bank. It is intended to break a vicious cycle of crisis-shaken banks and bailouts. But the plan is facing some resistance from Germany.

European Commission President José Manuel Barroso is setting a collision course with Berlin on some aspects of his plan for a powerful euro-zone bank supervisor. Zoom
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European Commission President José Manuel Barroso is setting a collision course with Berlin on some aspects of his plan for a powerful euro-zone bank supervisor.

José Manuel Barroso wants to present himself as a true president of Europe. Following the example of American presidents, this Wednesday morning he will address the 754 representatives of the European Parliament in Strasbourg, giving a speech on the state of the European Union. He will evoke the dangers of the financial crisis -- and then present a way out.

The representatives in Brussels have been working all summer on this solution: By the end of the year, they plan to have a common banking union in place for the 17 euro-zone countries, a unified supervisory system led by the European Central Bank (ECB) in Frankfurt. The banking union is intended to break a vicious cycle of crisis-shaken banks and governments forced to shell out massive amounts of aid.

"Barroso wants to make it into Europe's history books," says one of his commissioners in Brussels. The president of the European Commission, the EU executive, has taken personal responsibility for creating this new system, taking it out of the hands of Internal Market Commissioner Michel Barnier, to whose portfolio a responsibility like that would usually belong. Barroso wants to turn over supervision of all 6,000 banks in the euro zone to the ECB; he will also present plans for joint bank supervision and for deposit insurance. Both these plans have the same ultimate effect: German savers and taxpayers will be made liable for problems experienced by all euro-zone banks.

An Overly Ambitious Timeframe

Such a degree of European solidarity can be quite an expensive thing, and these latest plans have alarmed the German government. It's "not a realistic assumption that the ECB will be able to take up this role by Jan. 1, 2013," says German Finance Minister Wolfgang Schäuble. The minister's financial experts consider that starting date overly ambitious, and say the pan-European bank supervisory system will certainly not be ready to launch by then. "That's wishful thinking," say those within the German government.

Germany doesn't see why the ECB should oversee regional banks within the euro zone as well. Schäuble advocates putting only the largest, transnational institutes under the supervision of the central bank.

Behind the government's resistance to Barroso's plan is a lobbying group that is likely the most powerful one in Germany: that of the savings banks, known in Germany as Sparkassen and credit unions. The two types of institutions are the places where more than half of German voters have accounts.

When Georg Fahrenschon was made president of the German Savings Banks Association (DSGV) in a ceremony at the Konzerthaus Berlin concert hall this May, even Angela Merkel hurried to attend, promising Fahrenschon, in the name of the federal government, "a willing ear for the savings banks' concerns."

Merkel has surely already heard, then, what Fahrenschon thinks about the banking union. "The chancellor must be aware that the European Commission's plans undermine the promise she made in 2008 to guarantee Germany's savings," the DSGV president says. Merkel and then-Finance Minister Peer Steinbrück had declared that all Germans' savings were secure, and that the government would vouch for that fact.

Concerns about Joint Deposit Insurance

"Merkel must abide by that guarantee," Fahrenschon insists now. The DSGV president and his counterpart at Germany's credit unions, Uwe Fröhlich, fear the banking union, and especially the joint deposit insurance scheme, will serve to redistribute risks and burdens within the euro zone.

German savers might start to doubt whether their money is still secure, Fahrenschon warns. "The federal government can't explain to its citizens that there should be no collectivization of European debt, yet that they should sacrifice the security of their savings to deal with the problems of Spanish banks."

To nip that whole problem in the bud, Fahrenschon wants to exempt savings banks and credit unions from ECB supervision. Centralized supervision, he says, makes sense only for around 25 major banks that play an important role in the stability of Europe's financial system as a whole.

Large institutes such as Deutsche Bank, though, find that approach unfair, saying that small banks are often responsible for big crises as well. If the goal is a Europe-wide financial market, warns Jürgen Fitschen, co-CEO of Deutsche Bank, then the approach can't be to always "make the lowest common denominator the yardstick for regulation."

The Bundesbank, Germany's central bank, has also cautioned the country's government about the dangers of inheriting existing debt burden from banks whose budgets aren't balanced. As soon as the Europe-wide banking supervisory mechanism is in place, a crisis-ridden Spanish bank, for example, could refill its coffers directly from the ESM bailout fund. The result, the Bundesbank fears, would be joint liability for all banking risk within the euro zone, with Germany forced to take on potentially sizeable risks.

The monetary watchdogs in Frankfurt accuse the German government of failing, during negotiations over the banking union, to insist on a thorough check of all European banks. The government, says the Bundesbank, allowed itself to be taken in by the other euro-zone countries.

Those other countries sped up the timeline during a late-night session at the EU summit this June. In a summit closing statement composed in the early morning hours, the heads of state and government explicitly called on the European Commission to present proposals for a unified supervisory mechanism "shortly," further requesting that the European Council, the powerful body comprised of the leaders of the 27 member states, consider the proposals "as a matter of urgency by the end of 2012." The statement continues on to say that, once a single supervisory mechanism is established, the ESM bailout fund would "have the possibility to recapitalize banks directly."

Many Countries See Clear Advantages in Proposal

The European Council plans to turn its prompt attention to the Commission's suggestions. In theory, every member country, including Germany, has veto power. But the majority of members -- not just Spain and Italy -- see the advantages of a joint supervisory body. Particularly for smaller countries, the prospect of no longer being at the mercy of their own banks' fates is an appealing one.

Barroso's plans also include a Europe-wide restructuring fund, intended to catch potential bankruptcy cases among financial institutions before entire economies end up peering into the abyss. The banks themselves are expected to use their own capital, contingent on their liabilities and risks, to build up considerable funds over the course of the next 10 years, which would then be made available in crisis situations.

Particularly problematic from a German viewpoint is the planned mutual support among national resolution systems. "For an optimal use of resources, the resolution Directive also takes advantage of the funding already available in the 27 Deposit Guarantee Schemes (DGS)," reads one press release from Brussels. Schäuble and his ministry want to prevent at all costs such a high level of collectivization of liability and risk through the proposed future bank resolution system. "As long as it is nation states that must pay, there will be no banking union," predicts one of the negotiators who will soon begin searching for a compromise.

Some members of the European Commission itself also criticize individual points in Barroso's plan. German Commissioner Günther Oettinger, for example, considers the collectivization of national deposit guarantee funds, with their various levels of value, unacceptable. The word in Brussels is that Oettinger planned to formally express his opposition on this point during a meeting of the 27 EU Commissioners on Tuesday to approve Barroso's plan. In Oettinger's view, only funds that the banks collect in the future should be used for Europe-wide liabilities.

Barroso, though, is prepared to fight for his project, and wants the European Parliament to pass a resolution this Thursday on an ambitious banking union. Securing a large majority in parliament is considered to be a sure thing. That the German government will be impressed is far less likely.

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1. Banks should pay for reckless lending --not the people
kavadias 09/15/2012
The target of a deposit guaranty fund, would be to perpetuate the ability of banks to make loans w/o supervision and regulation. This is a way for bank business to have no risk! This approach of having nations to pay for bank's insolvency, is what has brought European countries in today's critical situation. Spreading the costs to all taxpayers in Europe, does not justify risk-less banking and victimization of taxpayers! Based on a system of evaluation of *all* banks, the authorities should force banks that fall bellow some rating to deleverage (not recapitalize!), up to full reserves in the limit. If extreme risks are taken they should be payed with the banks' money and not based on blowing up the money supply, creating systemic risks! The "banking union" approach is a mistake and taxpayers will pay for it. The only thing that should be based on collaboration is the evaluation of banks. This is the only area where a union of evaluation authorities makes sense and is actually required. To the degree that the banks are not made accountable for their risks, collective responsibility will need to be taken, and a unified european deposit guaranty fund will be required, where national deposit guaranty funds could do the job, allowing for differentiation of country banking sector, based on whether banks are taxed to fuel the national deposit guaranty fund. All that provide indications that European authorities are heavily influenced by the banking establishment, and will not solve the problematic cycle of bank-insolvency and country-lending to the benefit of the people, but in favor of larger bank profits... Consumer attitude does not answer to such political misdirection. Only the approach of conscious citizens can bring the real issues back to the center of the political agenda.
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