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PARIS — The destructive beast of nationalism is back on the prowl in Europe’s banking sector.
Seven years after European leaders agreed to crisis-proof the Continent’s banks by bringing much of the sector under the supervision of the EU, national governments and regulators are undermining the effort.
European governments agreed in 2012 to create a banking union with a single supervisor and resolution system for all systemic banks in the eurozone. But major pieces are still missing. These include a European deposit insurance scheme that would protect citizens’ savings equally across the 19-nation currency area, underwriting national guarantees, as well as a common fiscal safety net for failed banks.
The result is a sector that’s stuck half-way between a federal system and national regulation. Politically unable to complete the banking union, the eurozone shows worrying signs of backsliding in ways that could increase the damage caused by the next financial crisis.
Ominously, governments from Berlin to Rome are stepping in to rescue failing banks with taxpayers’ money or by exploiting national prerogatives and loopholes in EU rules to bypass the supervision and resolution mechanisms they put in place at the European Central Bank.
This makes a nonsense of the EU’s cherished “level playing field.” It prevents the weak from going to the wall and obstructs the cross-border mergers and acquisitions needed to build healthy pan-European banks able to fund the eurozone economy and compete with their U.S. or Asian peers.
The culprits include Germany — which loves to lecture others about the evils of moral hazard and the need to make reckless lenders pay to clean up the banks instead of putting citizens on the hook.
In the last few weeks, the state of Lower Saxony has provided a public guarantee, with Berlin’s blessing, for publicly-owned German savings banks to rescue ailing lender Nord LB, which has been weighed down by bad loans to shipping companies.
Nord LB performed worst in the European Banking Authority’s stress tests last year. Germany made sure its savings banks were kept out of EU supervision by insisting on setting a high asset threshold for ECB-regulated banks.
Meanwhile, Italy’s populist government — made up of anti-establishment parties that had sworn to end taxpayer bailouts for banks — has put up a public guarantee for efforts to save troubled Banca Carige. The country’s 10th largest lender, it has been placed under temporary administration by ECB supervisors.
Even if such state aid is authorized by the EU’s competition commissioner, it raises concerns about double standards in the enforcement of the rules and the use of loopholes to avoid burning politically influential shareholders and forcing senior bondholders to take losses.
Another facet of protectionism in the banking sector is the effort to preserve national champions rather than letting market forces prevail. Berlin has refused to comment on persistent media reports that it is trying to arrange a shotgun wedding between two troubled German giants, Deutsche Bank and Commerzbank. It owns a 15 percent stake in the latter.
Such a mega-merger might create a bank that is “too big to fail,” increasing the risk to taxpayers. At the same time Berlin is a prime offender in restricting the freedom of cross-border foreign banks that have subsidiaries in Germany.
Hands are tied
Bankers who spoke at the POLITICO Finance summit in Paris last month were highly critical of the obstacles they face to doing business. They suggested that national regulators are tying the hands of their transnational banking groups by preventing them moving capital and liquidity across borders within the European market.
“There is a conflict between the EU and the national level,” said Philippe Heim, deputy CEO of Societe Generale, France’s third biggest bank by assets. “It’s not possible to have the benefit of this consolidation as long as we treat flows between each part of the banking union as external flows.”
Jean-Pierre Mustier, CEO of Italy’s UniCredit, which owns banks in Germany, Austria, Romania and Bulgaria, said the powers of the ECB’s Single Supervisory Mechanism and Single Resolution Mechanism should be extended so that the same regulations apply uniformly to everyone.
“Europe needs bigger banks to finance small and medium-size enterprises,” he said. “We need to ensure the banking sector is seen as a single sector. A balance sheet in Germany and Italy must mean the same thing.”
Not all the news is bad. The ECB’s single supervisor for big systemic banks has helped raise standards and transparency across the eurozone, increasing market confidence in the banking system, and EU lawmakers have just finalized new rules for the treatment of non-performing loans.
But some trend lines are pointing in the wrong direction. The challenging of EU budget discipline by Italy’s maverick government has given the so-called Hanseatic league of small, fiscally conservative countries new grounds to resist any common budget, fiscal backstop or deposit guarantee for the single currency area.
Northern countries including Germany keep adding prerequisites before they are willing to share any more risk. First, it was that banks must dispose of legacy bad loans. Then they insisted that lenders must reduce their exposure to home-state sovereign bonds or take risk charges on those holdings. Now they add that European insolvency laws must first be harmonized.
Joerg Kukies, secretary of state at the German finance ministry | Stephanie Lecocq/EPA
EU leaders vowed in 2012 to break the “vicious circle” between banks and sovereigns. Joerg Kukies, secretary of state at the German finance ministry, insisted at the POLITICO summit that the EU had made “very substantial progress in breaking the link between bank resolution and taxpayer money” since every bank now had bigger buffers of disposable capital that can be bailed in before any recourse to public funds.
But there’s much more to be done. Just as important as an EU-wide deposit guarantee or a fiscal safety net for banking resolution is to transfer all banking supervision to the European level and clip the wings of national regulators.
Until that’s done, the EU will not have a truly storm-proof banking union. Sadly, it’s looking like it will take another financial crisis to get there.
