Bundesbank on Banking Union
This post was written by Colm McCarthy
The impetus for a banking union has been gathering pace. Frankfurt is a city blessed with two central banks and one of them seems to be getting nervous.
The Bundesbank fielded two executive board members today, expressing concerns about their perception of what a banking union would entail.
Courtesy Dow Jones Newswires:
‘Talk of a banking union in the euro zone is premature, a key member of the executive board of Germany’s Bundesbank said Tuesday, arguing that such a plan could only follow deeper fiscal union.
“The recent proposals of a so-called banking union appear to be premature,” Bundesbank board member Andreas Dombret told an audience of bankers at a conference in London.’
Banks in Germany have already signalled opposition to having their existing deposit guarantee schemes potentially used to rescue banks in other countries.The “decisive question” of banking union was the “interplay between liability and control” because a crisis in one country’s banks could require financial help from taxpayers in other countries, Ms Lautenschläger said. “Whoever accepts liability also has to have a right to control, especially when it is potentially a question of very large sums as in the case of a banking crisis.”
Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.
“The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.”
Ms Lautenschläger also cast doubt on how quickly any banking union could be implemented, saying “comprehensive EU treaty changes” would be needed.
Readers will be greatly encouraged to learn of the Buba’s late conversion to the merits of market discipline. Does this mean market discipline only for sovereigns or for banks also?. Did the Bundesbank oppose the policy of the ECB on this matter in October 2010 when the Irish government was coerced into payouts on zombie bank bonds by the other central bank in Frankfurt?
There have been some flaky versions of the ‘banking union’ notion, including mutualised moral hazard for banks. Banking union means (funded) deposit insurance, centralised bank supervision and, critically, proper bank resolution, including the de-commissioning of the ECB’s moral hazard machine. Without bank resolution the sovereign debt crisis is not soluble. Could the Bundesbank be prevailed upon to address two questions:
(1) Can the sovereign debt crisis be resolved with permanent moral hazard for banks and indefinite contingent liability for their sovereigns?
(2) What suggestions can the Bundesbank offer to resolve the current undercapitalisation of the Eurozone banking system?
The perception is inescapable that people who continually rule out the measures needed to rescue the common currency project are indifferent to its fate.