Is Europe ready for banking union?

by Nicolas Véron

Vox
May 23, 2012

Many policymakers and academics are now agreed that a banking union, together with some form of fiscal union, is needed if the Eurozone is to emerge from the crisis in one piece. This column argues that while the current proposals for a banking union still need to be fine tuned, the crisis calls for swift and bold action.

Systemic fragility in the European banking sector predates the Greek fiscal crisis. It was revealed by the subprime/Lehman shock of 2007-2008, and has never been properly addressed since then – despite the successive ‘stress tests’. In recent weeks, several senior policymakers have become more explicit on the need for a ‘banking union’ – in other words, a federal framework for banking policy. Among them is Christine Lagarde, managing director of the IMF, in line with earlier pronouncements by the Fund (Fonteyne et al. 2010). On 17 April she said, “To break the feedback loop between sovereigns and banks, we need more risk-sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks would help. Looking further ahead, monetary union needs to be supported by stronger financial integration, which our analysis suggests should be in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund” (Lagarde 2012). The ECB President echoed these words at the European Parliament on April 25, declaring that he saw “financial stability clearly as a common responsibility in a monetary union” and that ”ensuring a well-functioning Economic and Monetary Union implies strengthening banking supervision and resolution at European level” (Draghi 2012).

Many academic observers now agree that a banking union, together with some form of fiscal union, is a necessary condition for a sustainable Eurozone monetary union and for a resolution of the current crisis (see for example Nielsen 2012; Schoenmaker and Gros 2012). But in spite of the creation of a European Banking Authority last year, the action taken so far has been modest. Spain is a case in point: Madrid could have appealed to the European Financial Stability Facility (EFSF) for a loan specially targeted at recapitalising its banks, but it has preferred to go it alone with the nationalisation of ailing champion Bankia, and a new round of property-related write-downs that have provoked much market scepticism.

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