What Does European Banking Union Mean?

Oct. 23, 2012 6:29 AM ETFXE, ERO-OLD, EU-OLD2 Comments
Martin Lowy profile picture
Martin Lowy

Effecting a European banking union was never going to be easy. We saw some signs of the political difficulties at last week's European summit. Disagreements between the French and German leaders, as well as Germany's refusal to use the multi-nation ESM fund to pay directly for bank recapitalizations, have grabbed the headlines. See here and here for examples. The meetings did come to some agreements, as embodied in a typically opaque communique, but they did not, in my view, resolve the fundamental issues.

Regarding banking union, the communiqué focused on the establishment of a bank supervisory arm within the ECB and the timetable for establishing that. Regarding the issues of deposit insurance, a bank resolution law, and bank recapitalization mechanisms, the communiqué was anything but clear. Regarding deposit insurance it said:

"The European Council calls for the rapid adoption of the provisions relating to the harmonisation of national resolution and deposit guarantee frameworks based on the Commission's legislative proposals on bank recovery and resolution and on national deposit guarantee schemes. The European Council calls for the rapid conclusion of the single rule book, including agreement on the proposals on bank capital requirements (CRR/CRD IV) by the end of the year."

"In all these matters, it is important to ensure a fair balance between home and host countries."

These statements suggest that the nationality of each bank will be maintained for deposit insurance purposes and that a single deposit insurance system is not envisioned, at least as part of the original architecture. Thus, all the banks are to be supervised by one central entity (within the ECB) but the deposit insurance systems will continue to be national. In my opinion, that is not workable because the decision to take over and remediate a bank must be taken centrally; to have different consequences for depositors in different countries would

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Martin Lowy profile picture
I was trained as a lawyer and practiced in the fields of corporate law and bank regulation in large U.S. firms for 20 years, then decided to do other things. My career has included banking and being an entrepreneur. For seven years I was CEO of a high-tech sports business. I have retired from active business and spend full-time writing, mostly on economic subjects. My books include: InStAbILItY: Booms, Busts, the Fragility of Banks, And What To Do about It 2017 High Rollers: Inside the S and L Debacle (1991) Debt Spiral: How Credit Failed Capitalism (2009) Practical Handbook for Bank Directors (1995), second edition due 2012 Corporate Governance for Public Company Directors (2003) Capitalism for Democrats (2019) Capitalism for America (2019)

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