Banking Union

"Though this be madness, yet there is method in it." The efforts on the part of some governments in the eurozone to set up a functional European banking union by the beginning of 2013 might certainly remind us of Polonius’s quip from Shakespeare’s drama "Hamlet". The "madness" lies in the impossibility of implementing this plan in only a few weeks. For the hurdles are numerous, ranging from its difficult legal underpinnings to the political complexity of creating an institution of this kind, which, after all, is intended to effectively oversee several thousand banks. The "method" is obvious, since only by creating a banking union will it be possible – in keeping with the 29 June 2012 resolutions of the Euro Group – to recapitalize banks that are in difficult through the European Stability Mechanism (ESM). It is apparent that a few governments simply cannot run fast enough in their efforts to obtain access to these funds, preferably in combination with a Europe-wide deposit guarantee.

Such haste does a disservice right from the start to the basically reasonable idea of a European Banking Union, since its creation is now accompanied by greater suspicion. Yet the German Council of Economic Experts has unequivocally expressed its opinion that a banking union should not be seen as an instrument for solving the current financial crisis. This raises three questions. What is the use of a European Banking Union, what framework rules should apply to it, and how do we design the road to get there?

The German Council of Economic Experts' Maastricht 2.0 model was developed with a view to the long-term stability of the currency union. Alongside the two pillars of fiscal stability and crisis management, the model foresees the creation of a European financial oversight agency as a third pillar, which would have wide-ranging competencies and rights of intervention. Under the model, the private financial system would be organised as a European Banking Union, and would feature a European regulatory authority, a European restructuring agency, and a European restructuring fund. The European Banking Union would not only have the function of issuing bank licenses, performing continuous oversight of financial institutions and initiating early intervention – in other words, "microprudential" oversight – but in addition, as a "macroprudential" oversight agency, it would identify systemic risks and set additional capital buffers for banks. The European Restructuring Agency would be responsible for restructuring and liquidating troubled banks that pose a risk to the stability of the European financial system. For this purpose, it would have at its disposal resources from the European Restructuring Fund, which, in turn, would be funded by a European bank levy, among other sources.

Two specific issues deserve attention. First, the German Council of Economic Experts expresses opposition to the European Central Bank (ECB) taking on the function of being the regulatory authority for European banking, since this activity may come into conflict with monetary policy. A risk to price level stability, for example, might make it necessary to institute a restrictive monetary policy, whereas from the perspective of banking supervision, it might be appropriate to provide a more generous injection of liquidity for troubled banks. Since politicians are nevertheless determined to entrust the ECB with the mission of banking supervision, the juridical problem arises of how to implement this legally. Presumably, the EU contracts will need to be modified, since the existing legal provision (Article 127, para. 6 of the TFEU) would appear to be incompatible with such far-reaching responsibilities for the ECB.

Second, the German Council of Economic Experts does not consider a Europe-wide deposit guarantee to be necessary. Guarantees can be accomplished through national responsibility. If financial difficulties should arise for the affected nation, the pathway of the European Stability Mechanism would remain open. Far from expedient, however, would be to establish a Europe-wide deposit security guarantee at this time. This would be similar to buying insurance after an incident of damage has already taken place.

The time-consuming transition to a Banking Union should take place in three phases. First, the necessary legal and institutional conditions should be established. Second, the banks should be reviewed and qualified. Only then should a comprehensive banking union be implemented. In any event, one principle should apply throughout the process: being thorough is more important than going fast!