Banking Union: Ireland vs. Nevada, an illustration of the importance of an integrated banking system Post author By Philip Lane Post date November 19, 2012 Daniel Gros compares Ireland and Nevada here. Categories In Uncategorized 25 Comments on Banking Union: Ireland vs. Nevada, an illustration of the importance of an integrated banking system ← Adjustment in the euro zone: More and more and not enough → Some Trends in Employment 25 replies on “Banking Union: Ireland vs. Nevada, an illustration of the importance of an integrated banking system” This type of analysis is useful but of little assistance in the real world. The EU is not a federal state and there is no possibility of it becoming one. If there were, the governments involved would be agreeable to the levying of some form federal taxation to fund desirable EU-wide initiatives such as a bank deposit insurance scheme (not to mention an annual budget). The German Council of Economic Experts, on the other hand, is situating its proposals in the realm of what is politically feasible. (HT Eurointelligence). http://voxeu.org/article/internal-market-banking-union-proposal-german-council-economic-experts This type of analysis, as DOCM has (apparently inadvertently) just demonstrated, is very useful in the real world. On its face, the banking union of which Nevada forms a part now, described in Gros’s article, is little different to the banking union described by the German Council of Economics Experts. Such a precedent provides a very useful benchmark against which to assess the Council’s proposals, and how they might operate in a future context otherwise similar to that of our last few years. The following extract from the report of the Council of Economic Experts is worthy of particular attention. “In addition, a European resolution authority is a necessary element of a banking union. This resolution authority should be funded through a bank levy. The fiscal backstop could be provided by the European Stabilisation Mechanism. Resorting to centralised fiscal resources at the European level is unlikely to be feasible in the foreseeable future, given the incentives to shift risks to the European level and the lack of willingness to give up fiscal sovereignty. Should additional fiscal resources for bank restructuring and resolution be needed, clear rules for fiscal burden sharing need to be defined ex ante.” Under the model that the Council of Economic Experts proposes, there is scope for the buffers that would have to be blown through before the design of fiscal sharing became relevant to be so substantial as to make burden sharing vanishingly likely. 1. Shareholders wiped out fully. 2. Holders of subordinated bonds wiped out fully. 3. Haircut on holders of senior bonds so that they do no better than they would under liquidation. If the resolution regime made them junior to the insured portion of deposits, there might only very rarely be a need to call on the deposit insurance fund. 4. Deposit insurance fund, which could be very large, depending on its specification. 5. ESM. fyi Parking Basel: A Case Study of How Banks Stymie Regulatory Reform – 11/19/2012 – Richard Smith Federal banking regulators on Friday took a step back from efforts to meet the international standards and capital rules promoted by the international Basel Committee on Banking Supervision (Basel III), delaying new rules that were set to begin at the start of the year. No alternative timeline was suggested. “Many industry participants have expressed concern that they may be subject to a final regulatory capital rule on Jan. 1 without sufficient time to understand the rule or to make necessary systems changes,” a joint statement by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency said. “In light of the volume of comments received and the wide range of views expressed during the comment period, the agencies do not expect that any of the proposed rules would become effective [by the effective date].” So when will the Basel III rules become effective in the US, then? If the grim views of Thomas Hoenig, vice chair of the Federal Deposit Insurance Corporation, have any weight, which they probably do, the most likely answer is never: Read on: http://www.nakedcapitalism.com/2012/11/parking-basel.html AFAIK the US never implemented BI @DOCM You might want to look up where the FDIC is funded from… @ hoganmayhew Why deprive anyone of the relevant information! “An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure. The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC insures approximately $9 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC’s Electronic Deposit Insurance Estimator can help you determine if you have adequate deposit insurance for your accounts.” An American solution to an American problem, the key being the reference to “federal government”. The EU does not have a federal government nor is it likely to get one. However, insofar as sense can be made of the phrase “breaking the vicious circle between sovereigns and banks”, the FDIC must be one of the routes to go. However, its existence did not remove the need from the federal government to bail out the “systemically important” banks. In other words, it is a solution for “Mom and Pop” banking, not the wider problem cf. remarks of the Governor of the ICB in his recent speech in Scotland. @DOCM You read, but you don’t understand, it appears. The EU has enough of a federal government to have an FDIC. Appropriations are not required, assuming an FDIC is appropriatly funded during a credit boom (it wasn’t). The key is the reference to “funded by premiums that banks and thrift institutions pay”. @ hoganmayhew I do! I agree that the EU has enough of a federal government, as you say, to create an FDIC but it is totally unwilling to do so. The Voxeu article should be read as an insider view of what may prove, ultimately, acceptable to Germany. For example, the view that ALL banks should be covered is a major point at odds with the current view of the German government. The argument that a treaty change is required, on the other hand, is specious. The treatie gives the necessary powers. The qualifications about a supposed conflict with regard to the mandate of the ECB may exist in the minds of most Germans but it is not in the treaties. The concern with regard to the non-members of the EA would also bring tears to one’s eyes. @ hoganmayhew In case you missed this link posted on another thread. http://www.irishtimes.com/newspaper/breaking/2012/1119/breaking25.html Hogan, If the EU banking union started now and if it set up a EUDIC how long would it be before it had built up the neccessary reserves to cope with the next 1/100 years banking crisis without resort to the taxpayer. In the Us, the FDIC made the depositor whole but the taxpayer was still on the hook for the capital hole in AIG, Fanny and Freddie and Citi and Bank of America, not to mention TARP and Govt. Motors. @ hoganmayhew What the Governor of the CBI had to say. “Expectations with regard to the likely roles of a common deposit insurance scheme and of a common bank resolution agency are still diffuse, I feel. Deposit insurance of the first €100,000, currently provided at national level, offers peace of mind to retail users of banking services, and a strengthening of the perceived backstop by pooling the responsibility and resources for payouts could help this, especially at a time when the creditworthiness of some national governments has been called into question. But it is well to understand what a common deposit insurance scheme can and cannot deliver. Deposit insurance does not fully protect banks and banking systems against wholesale bank runs, which are typically much faster and larger than anything generated by retail holders.” @ All FYI http://www.telegraph.co.uk/news/worldnews/europe/spain/9689008/Foreigners-offered-chance-to-stay-in-Spain-for-130000.html Desperate situations require desperate measures! @ All And a plea from Gideon Rachman for understanding of the UK position. http://www.ft.com/intl/cms/s/0/d97d4058-323b-11e2-916a-00144feabdc0.html#axzz2ChWEDO85 One small difficulty, however! The UK has, indeed, been involved in the history of the Continent’s wars for centuries but has followed a policy of divide and conquer. The suspicion that this policy is being continued is what explains the lack of sympathy for Cameron. CARTOON OF THE DAY http://www.spiegel.de/international/europe/bild-868005-427242.html DOCM, The Brits don’t have a recent track record of trying to conquer or dominate the continent and they certainly have not thrashed the place in the last century. France loses its AAA rating High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email firstname.lastname@example.org to buy additional rights. http://www.ft.com/cms/s/0/ad840f74-3018-11e2-891b-00144feabdc0.html#ixzz2CihxHRzL “It’s a huge bet,” said one senior UK fund manager. “It is beyond the scale of comprehension in a small, periphery market like Ireland.” Franklin Templeton’s heavy third-quarter purchases helped subdue Ireland’s bond yields, despite the headwinds of poor news. Sorry..machine went wild. Big story is France… http://www.telegraph.co.uk/finance/financialcrisis/9689457/France-stripped-of-prized-AAA-credit-rating-by-Moodys.html @ All FYI http://www.irishtimes.com/newspaper/finance/2012/1120/1224326838254.html @ TMD It must surely have been clear that I was referring to the negotiating tactics of the UK not to any belligerent military intentions. Incidentally, Cameron seems to have shifted his ground by referring only to the Commission’s budget proposals not to the UK demand for a cut in real terms. Maybe there is belated recognition that the tactic of divide and conquer does not work. One large difference not noted by Gros here is that there have been massive foreclosures/evictions in Nevada and minimalist in Ireland. Bankrupty is also much of a taken for granted – unlike here where the 3 yr can be extended to an 8 yr …. probably something rooted in the jansenistic/possesive culture of the past that lingers …. His main points are, as usual, valid. Banking Union in EZ remains essential to near future integration. I’d still like to get rid of Article 123 of the Lisbon Treaty and get a good peek at the books of the Landesbanken – but at the mo EU is regressing to nationalism and Angela’s and Wolfgang’s attempts to grant local elections priority over EZ crisis resolution does not bode well …. sanest EZ financial head at the mo is Jorg Asmussen …. wonder does he play cricket? Der Spiegal has an article which is highly critical of Herr Schauble and suggests Christine Lagarde is tired of the “deception” from Berlin. http://www.spiegel.de/international/europe/accounting-tricks-in-berlin-impede-greece-bailout-strategy-a-868085.html @DOCM “I do! I agree that the EU has enough of a federal government, as you say, to create an FDIC but it is totally unwilling to do so.” Agreed. I also agree that no treaty change appears required. @Tull Well, yes and no. Not sure how Auto bailouts are relevant to banking regulation except in the broad tea party sense. TARP funding ended up being mostly loans, it appears. The FDIC did get an advance from Congress to allow it to resolve banks beyond its current means and that would need to come from somewhere should there be a requirement to resolve before funds have built up. It is, though, also a loan and deposit insurance costs can be varied… @ All FYI http://www.guardian.co.uk/world/2012/nov/21/david-cameron-rejects-eu-budget-compromise The best bit is surely the following; “Britain would have become one of the EU’s largest net beneficiaries, paid for in large part by the new member states whose accession was the realisation of Thatcher’s dream of enlargement.” When it comes to brass neck the Tories are in a league of their own! Despite all the noise and fury, it would be surprising if Cameron repeats his veto (on the fiscal treaty) performance. If he does, it will be the clearest signal hitherto that the UK is, indeed, looking to the exit. http://www.openeuropeblog.blogspot.se/2012/11/the-eu-budget-veto-count-and-so-they.html “ten EU member states (UK, Denmark, Sweden, Italy, France, Portugal, Latvia, The Netherlands, Austria and Romania) have now explicitly threatened to veto the 2014-2020 EU budget.” Comments are closed.