European Banking Union

This post was written by

There is an FT op-ed today by Hau and Sinn, which is mainly about the importance of ensuring sufficient creditor bail-in to limit calls on taxpayers in the event of a crisis. However, it also argues that the ECB has gone too far in providing liquidity against distressed collateral in the periphery.  You can find it here.

There is a guest article by Avinash Persaud in The Economist here.  Persaud is concerned that a single supervisory mechanism will lead to “one size fits all” regulation of banks across the euro area, so that the response to country-specific asset bubbles may be inadequate.  It is not clear to me why a unified approach to regulation is inconsistent with the implementation of country-specific macro-prudential measures.

26 Responses to “European Banking Union”

  1. DOCM Says:

    The alarmist and populist theses advanced by the learned professor seem to be running out of steam, even in his native Germany.

    The idea that the EA can be divided between those countries that are in economic trouble and those that are not is too facile. A minister in the French government (the Minister for Labour, Michel Sapin) has had the bad grace to describe his country as being “totally bankrupt”. This has not gone down well in the ranks of the Socialist Party, as might have been expected.

    Le Figaro has pulled together the statistics.

    http://www.lefigaro.fr/conjoncture/2013/01/28/20002-20130128ARTFIG00754-france-en-faillite-cinq-indicateurs-qui-inquietent.php

    These are alarming!

  2. Paul W Says:

    “The ECB is now in the same position as private investors. It is guaranteeing the survival of banks loaded with toxic real estate loans and government credit. So the tranquillity is artificial. Ultimately, the ECB undermines the allocative function of the capital market by shifting the liability from market agents to governments.
    But do the European Stability Mechanism (the eurozone’s rescue fund) and the banking union plan not ask for more from private creditors? If so, they do not go anywhere near far enough.”

    Difficult to argue against that. A very well written and argued piece, looking to the future, even if not to the PIIGS’ liking (and allowing for some wriggle room for argument for the restructure of Ireland’s Odious bank debt). It clearly sets out the fears of the creditor nations and does a useful service in weighing the alternative arguments. However, it is clearly only a creditor’s perspective piece….and there is a debtors’ side to the story which needs to be balanced in the equation. Positively, the European Commission is putting the case for the debtors, with emphasis on resolution of the current mess before transition to a ‘better place’. The problem with this Hau and Sinn article is that it doesn’t allow for such resolution i.e. it doesn’t distinguish resolution of the present mess from the future necessary ‘bail in’ balance.

    Still, this succinctly expresses the fears and blockages that Ireland faces in arguing for a resolution of its bank debt. Unfortunately, ‘special case’ status for Ireland will only be allowed if Ireland is facing real crisis (and it must be very dificult for the crs to now believe Mr. Gilmore’s ‘catastrophe’ claims given the way the Govt has played its cards up ’til now). In the meantime, the ‘minimum’ will be given as Mr. Soros says i.e. very, very little.

    If Ireland wants to get more, it will need to be bolder. Default is too far perhaps, but did that Iceland case not show one possibility? As Colm McCarthy has previously argued, Ireland should take (or at least threaten) an ECJ action. That would rattle the crs but would not cause a catastrophe for the country.

  3. Tullmcadoo Says:

    Paul W,
    I cannot see the purpose of legal action unlee you coughs somehow seek an injunction preventing the ECB doing something bad in the event we do something unilateral.
    Legal action would take too long to resolve. In the meantime what do we do-pay as we go.
    The logical step is to issue an ultimatum saying we are not going to pay now or at any time in the future. Then let them sue us or whatever.
    Of course to do that involves taking other steps on the budgetary side as well as having a plan B for a currency.
    Changing the negotiating team and adopting a more strident tone or even a smoother tone achieves nothing.
    Then there is the small issue of a mandate to do that.

  4. bazza Says:

    If I’m not mistaken, the author’s criticism of the extent of creditor bail-ins during bank resolution is difficult to argue with. If this had been applied in Ireland’s case, the Irish sovereign and taxpayers would be in a much better position now.

    However, I see no mention of depositors in the piece (except implicitly via a mention of high net worth households). Is he arguing that Depositors should be treated in the same way as bond and equity holders? This to me is both unrealistic from a political perspective and undesirable from an economic and social perspective. Deposit insurance must surely be a requirement of a EZ wide banking system.

    Finally, why oh why do they conflate the criticism of the current banking union proposals with the old Target2 trope? Its a separate issue and Sinn seems to want to use the banking union proposal to beat his drum about the ECB’s role as lender of last resort. It’s pathetic. Either we have a functioning Central Bank providing last resort lending to banks accross the EZ, or we get widespread default and depression 1930s style, along with the likely break-up of the EZ.

  5. Paul W Says:

    @ Tull
    There is absolutely nothing preventing Ireland pursuing a legal action while it continues with the Troika programme. A legal action would be aimed at the legality of the bank guarantee plus related. In that sense, it would be a ‘just’ /high moral ground action that would be difficult for the crs to deal with….it raises the possibility that they may not have right on their side, and they do not control the process…which crs absolutely abhor. There will be strenuous noises of course that the crs will contest, etc….but the question mark will be there.

    @ Bazza
    “Either we have a functioning Central Bank providing last resort lending to banks accross the EZ, or we get widespread default and depression 1930s style, along with the likely break-up of the EZ.”
    I think you are moving way too fast for the Germans, the Dutch, the Finns, etc….Without a compulsion mechanism, this will be a very slow process. The cr nations do not do ‘ultimatums’ without there being self economic interest. Moral indignation with the current situation of the PIIGS doesn’t cut much when it comes to hard, cold ‘money’.

  6. Paul W Says:

    Point too about such an action is that Ireland has everything to gain but little by comparison to lose.

    Ireland needs to act like a commercial debtor would. Defend itself, legally and otherwise.

  7. Tullmcadoo Says:

    Paul w,
    Interesting use of term “and otherwise”. Please clarify whether this involves paying the PN on time?

  8. Jesper Says:

    The one and only thing that the single supervisory system has succeeded with is to reduce accountability. An example:
    http://www.independent.ie/business/irish/exanglo-supervisor-to-stay-in-plum-euro-job-3367778.html

    Same guy, same laws but the idea seems to be that since he is now reporting to a supranational body he is no longer accountable to Ireland and to by the looks of the EBA, accountability is being spread out so much that nobody ends up being accountable for anything.

    The result is that countries that don’t regulate and/or implement country-specific macro-prudential policies can spread out the cost of dealing with their busts to whoever is stupid enough to agree guarantee their accumulated bubble debts.

    Would you have him regulate Irish banks if you couldn’t pass the costs of a possible future banking failure to the rest of the euro-zone?

    If the answer is yes, then you don’t need future euro-zone support for bailing out banks.
    If the answer is no, then why was he appointed?

  9. Paul W Says:

    @ Tull

    The likes of Meg Greene and others have set out various ‘stand your ground’ strategies in the last (short) while, some ‘softer’ than others. What I like about the legal action route as originally suggested by CMcC is that the Icelandic case has now been won by Iceland and povides an International Law precedent. Also, it reinforces the unfairness of Ireland’s treatment which is being extensively argued by the Irish Govt (at long bloody last!). It is a “harder” push back mechanism that falls short of “catastrophe”, and obviously should be one of the many different options pursued.

  10. Tullmcadoo Says:

    Paul W,
    So do we pay pending legal action or not?

  11. bazza Says:

    @Paul W
    I think you misunderstand my post. I was defending the current LOLR function of the ECB through ELA and Target2.

  12. Paul W Says:

    @ Tull

    Normally such an action would include a ‘stanstill agreement’. However, the Govt has left this far too late, so yes there is a problem with payment /not. However, my bet is that it is not in the crs interests to call default. So, while it may seem bizarre, they will fund /agree to defer in face of no payment, regardless of a legal action. It’s not just that Ireland has no (rather little) choice in relation to the PNs and rlated. However, that’s a separate item to the legal action.

  13. Paul W Says:

    Makes me wonder though whether payment could be forced into a court escrow account pending resolution of the issues. Legally paid but held by the court pending settlement of the crs’ entitlements /not.

  14. Tullmcadoo Says:

    Paul W,
    I was wondering about an escrow a/c after your previous post. Or give somebody a 40 year bond as an act of good faith. Let the ECB stew. Oh and print the 2010 letter as well if it exists.

  15. DOCM Says:

    @ All

    The Daily Business Post (Cliff Taylor and Pat Leahy) is carrying the most detailed and, it would seem, informed coverage.

    The ECB is in the minds of many, and certainly in the popular one, equated with other European, and by definition, foreign, institutions. The bank is, however, just the public face of the European System of Central Banks (ESCB) of which the Irish Central Bank is a constituent part. The ECB’s treaty-based independence is its most valued asset. It does not negotiate with ANYONE. It would seem foolish in the extreme to ignore this reality as to do so can only make dialogue with the bank immeasurably more difficult, if possible at all.

    There may be legitimate questions with regard to democratic control of such an institution but these must be for another day.

    The debate in Ireland is too narrowly focused cf. this article in Die Zeit where the author seeks to share the honours between Draghi, Merkel and Weidmann as to the improvement in the euro’s fortunes (!). As the saying has it, “success has many parents, failure is an orphan”.

    http://www.welt.de/print/welt_kompakt/debatte/article113199510/Die-Euro-Retter.html

    The general point is that, with confidence in the euro re-established, now is clearly not the moment in the minds of the heavy hitters for any indication of woolly thinking with regard to the ECB’s main credibility plank; no monetary financing of governments (or even the hint of it).

  16. Tullmcadoo Says:

    DOCM,
    Dear oh dear, we will have to rename you Comical Hans.
    Any shred of credibility that the ECB has left is despite Weideman not because of. He came close to destroying the EU with his insane views.
    The failure to re-engineer the PN will mark the end of this govt. That is of no consequence the EU save for it’s replacement will be eurosceptiic at least. There will be no success story for the Troika. My hope is that it ends in default and exit from the EU. We Weill quickly be followed by most of the periphery.

  17. DOCM Says:

    @ TMD

    You evidently missed the exclamation mark. I repeat it here (!).

    The point ius not that the author is correct but that a newspaper on the conservative wing in Germany feels it necessary to get Merkel and Weidmann on to the celebration float.

  18. DOCM Says:

    @ TMD

    By the way, the final paragraph of the article is of particular interest in that it identifies where the real problem lies i.e. in the country which, with Germany, makes up half of the economic activity of the EA, and, by the admission of one of its own ministers, is “totally bankrupt” (see above).

    “Die größte Unsicherheit für die Zukunft der Euro-Zone geht heute von Frankreich aus. Im Gegensatz zu der Trias von Draghi, Merkel und Weidmann streitet der sozialistische Präsident Hollande weniger für eine Stabilitäts- denn für eine Haftungsunion. Die französische Wirtschaft droht derweil selbst zum Krisenfall zu werden. Denn die EU übt zwar erfolgreich Druck auf diejenigen Länder aus, die unter den Rettungsschirm schlüpfen mussten. Doch Frankreichs Regierung ist bislang nicht bereit, sich von den Partnern überzeugen zu lassen, auf einen Spar- und Modernisierungskurs umzuschwenken. Und auch mit Blick auf die Bewältigung der europäischen Schuldenkrise kommt aus Paris eine Menge Störfeuer. Der Druck der Märkte aber wird früher oder später auch Hollande disziplinieren.”

    Google Translate provides a very good translation of the original article. The last sentence above reads; “The pressure of the markets will sooner or later also discipline Hollande”.

    This will hopefully happen before May when Merkel and Hollande, according to their statements after the celebration of the 50th anniversary of the Elysee Treaty between the two countries, are scheduled to make proposals on deepening economic and monetary union.

  19. DOCM Says:

    @ TMD

    The distribution of energy costs in their respective countries is one of the subjects that Merkel and Hollande might suitably address. After all, neither has access to ready domestic sources of energy supply (if one excludes nuclear in the case of France and the deal struck by Schroeder with Russia with regard to direct supplies of natural gas).

    http://online.wsj.com/article/SB10001424127887323751104578149144050909144.html

    What is interesting is not the capricious nature of decision-making by Merkel but that the contradictions that result are emerging at home and not in the EU as a whole.

  20. Eureka Says:

    @ Tull
    There is no alternative government.
    The PN issue is a strange one. If the government can weather the storm, come out straight and apologise to the Irish people it could be a turnaround – a chance for them to align themselves with their people.
    And then we start missing targets

  21. Eureka Says:

    ….and finding legal reasons not to sell Coillte

  22. Tullmcadoo Says:

    It is now in the govts interest to throw the toys out of the pram. A good sell off in markets would secure a better outcome.

  23. Paul W Says:

    Very straight interview with Megan Moore on RTE 1 this evening. “no monetary financing of governments (or even the hint of it)” as per DOCM is also her view. She also agrees with Tull that “The failure to re-engineer the PN will mark the end of this govt.”

    I had dinner with a senior member of the Irish tax establishment this evening, a longstanding and firm friend I might add. Depressingly the attitude is that emigration is inevitable and helps those remaining behind (too small an island for everyone to live here repeated), suicide levels are regrettable but it’s”just how things are”, etc, etc…basically the old status quo is good, any “radical thinking” is not. Sure, every country is borrowing beyond its means, etc, etc. Most disconcerting (depressing), I have to say, given how influential this person is in the fiscal system….

  24. Eureka Says:

    @ Tull
    That’s what they expect us to do. Markets won’t go mad because they reckon ECB will buy their bonds on the secondary market anyway.
    They’re our toys – lets hang on to them.

    It’s a two step check mate – basically they can’t not (sorry) give us the money because that forces us to default and to crank up the punt printing press (ah bliss) and create debt contagion. Lets miss the targets and see what they’re going to do about it!

    And if this government sells off Coillte it will be unforgivable

  25. Eureka Says:

    They’ll be allowed set up a bank (or use an existing bank(s)) to lend them the money to pay off the 3.5 bn per year. The loans will be over about 5 years each for low interest.
    There’s really no problem in them financing through a longer term bond – it’s just that that bond mustn’t be from the CB. Ironically Anglo could almost lend them the money to pay itself back.

  26. Michael Hennigan - Finfacts Says:

    Deutsche Bank says: “by agreeing to establish a double majority requirement for decision-making in the EBA, EU leaders destined the EBA to become a paralysed institution, because member states not participating in banking union, chiefly the UK, will enjoy a disproportionate amount of influence and will be in a position to veto any agreement. The chances for the EBA to really establish a single rule book – which is a pre-requisite for effective supra-national – supervision are slim…In short: EU leaders first promised speedy establishment of a banking union, then a diligent design of banking union. In the end, they delivered neither. If this is the deal, then better none than this one. One can only hope that the European Parliament in the course of the legislative process will instill greater consistency into the final design.”

    As to the debt talks, the confusing messages on the economic situation and prospects must have consequences.

    The Central Bank’s Quarterly Bulletin issued yesterday:

    Computer services exports grew at an average rate of 14.6 per cent over the first three quarters of the year while the value of business services exports was 14.2 per cent higher in the year to Q3 2012 compared to the same period in 2011.These two sectors combined account for over two-thirds of services exports.

    Ignoring Motorola Mobility in 2012, Google’s revenues jumped by 62% in the period 2010-2012. It diverts about 45% of the total to Ireland. Facebook started at zero in 2009. The hike in business services invoicing is likely Apple Ireland which is responsible for most of the world ex the Americas and China.

    The Central Bank does make a half-concession to reality:

    As has been pointed out in previous Bulletins, due to structural changes in the economy, the standard international measures of competitiveness and productivity growth overstate the level of improvement which has occurred.

    ‘structural changes’?

    My log ‘Economic fairytales of Ireland: Delusion déjà vu returns’ will be available shortly!

Leave a Reply