A Fragile Euro System Still Needs a Genuine Banking Union

Bloomberg Editorial
September 24, 2012

As recently as a couple of weeks ago, it seemed that Europe’s governments had reached agreement on the need for a banking union. This consensus, if it ever existed, is unraveling, and that’s dangerous.

When Mario Draghi, president of the European Central Bank, announced his plan for a big, new euro-zone bond-buying program this month, he rightly linked it to progress in building new European institutions. Banking union belongs at the top of the list.

The logic is simple. The euro area has a deeply integrated financial system. It lacks a single bank regulator, a common resolution agency for distressed banks and a deposit insurance system that spans the currency zone. That’s what “banking union” means.

At least, that’s what we thought it meant. Recently the European Commission, the European Union’s executive arm, published its bank-regulation plan. It would give the ECB new supervisory powers over the euro area’s 6,000 banks, which is good. The other two elements of a banking union -- a single system of bank resolution and an area-wide deposit insurance system -- have apparently been set aside. Not so good.

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