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Pc 2012 12 Banking Union Policy Contribution v2906

Pc 2012 12 Banking Union Policy Contribution v2906

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Published by: Bruegel on Jun 29, 2012
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ISSUE2012/12JUNE2012
WHATKINDOFEUROPEANBANKINGUNION?
JEANPISANI-FERRY,ANDRESAPIR,NICOLASVERONANDGUNTRAMB.WOLFF
Highlights
Thispolicycontributiondiscussesindetailhowafuturebankingunioncouldbeorgani-sedbyexaminingsevenfundamentalchoicesthatdecisionmakerswillneedtomake:-WhichEUcountriesshouldparticipateinthebankingunion?-Towhichcategoriesofbanksshoulditapply?-Whichinstitutionshouldbetaskedwithsupervision?-Whichoneshoulddealwithresolution?-Howcentralisedshouldthedepositinsurancesystembe?-Whatkindoffiscalbackingwouldberequired?-Whatgovernanceframeworkandpoliticalinstitutionswouldbeneeded?Thepaperdiscusseshowthetransitionfromthecurrentstatetothefuturebankingunioncouldbeorganisedandwhattheshorttermstepsmightbe.
Jean Pisani-Ferry
(jean.pisani-ferry@bruegel.org)isBruegel’sDirector.
André Sapir
(andre.sapir@bruegel.org)isaSeniorFellowatBruegel.
Nicolas Véron
(n.veron@brue-gel.org)isaSeniorFellowatBruegelandVisitingFellowatthePetersonInstituteforInter-naionalEconomics.
GuntramB.Wolff 
isBruegel’sDeputyDirector.
ThispaperbenefitedfromaworkshopheldatBruegelon11June2012.Wearegratefultoallparticipantsfortheircontributionstodiscussionsheldonthatoccasion.WethankChiaraAngeloniandSilviaMerlerfordiligentandeffectiveresearchassistanceinthepre- parationofthispaper.
Telephone
+3222274210info@bruegel.org
www.bruegel.org
BRUEGEL
POLICY
CONTRIBUTION
 
02
BRUEGEL
POLICY
CONTRIBUTION
WHATKINDOFEUROPEANBANKINGUNION?
Pisani-Ferry,Sapir,Véron,Wolff 
WHATKINDOFEUROPEANBANKINGUNION?
JEANPISANI-FERRY,ANDRESAPIR,NICOLASVERONANDGUNTRAMB.WOLFF,JUNE2012
ABSTRACT
This paper discusses the creation of a EuropeanBanking Union. First, we discuss questions of design. We highlight seven fundamental choicesthatdecision-makerswillneedtomake:WhichEUcountries should participate in the bankingunion? To which categories of banks should itapply? Which institution should be tasked withsupervision? Which one should deal withresolution? How centralised should the depositinsurancesystembe?Whatkindoffiscalbackingwould be required? What governance frameworkand political institutions would be needed?Intermsofgeographicalscope,weseethecover-ageofthebankingunionoftheeuroareaasnec-essary and of additional countries as desirable,eventhoughthiswouldentailimportantadditionaleconomic difficulties. The system should ideallycover all banks within the countries included, inorder to prevent major competitive and distribu-tionaldistortions.Supervisoryauthorityshouldbe grantedeithertoboththeECBandanewagency,or to a new agency alone. National supervisors,actingundertheauthorityoftheEuropeansuper-visor, would be tasked with the supervision of smaller banks in accordance with the subsidiar-ity principle. A European resolution authorityshouldbeestablished,withthepossibilityofdraw-ing on ESM resources. A fully centralised depositinsurance system would eventually be desirable,but a system of partial reinsurance may also beenvisaged at least in a first phase. A bankingunion would require at least implicit European fiscal backing, with significant political authorityand legitimacy. Thus, banking union cannot beconsidered entirely separately from fiscal unionandpoliticalunion.ThemostdifficultchallengeofcreatingaEuropeanbanking union lies with the short-term stepstowardsitseventualimplementation.Manybanksintheeuroarea,andespeciallyinthecrisiscoun-tries, are currently under stress, and the movetowards banking union almost certainly has sig-nificant distributional implications. Yet it is pre-cisely because banks are under such stress thatearlyandconcreteactionisneeded.Anoverarch-ing principle for such action is to minimise thecost to taxpayers. The first step should be tocreate a European supervisor that will anchor thedevelopment of the future banking union. In par-allel, a capability to quickly assess the true capi-talpositionofthesystem’smostimportantbanksshould be created, for which we suggest estab-lishingatemporaryEuropeanBankingSectorTaskForce working together with the European super-visorandotherauthorities.Ideally,problemsiden-tified by this process should be resolved bynational authorities; in case fiscal capacitieswouldproveinsufficient,theEuropeanlevelwouldtake over in the country concerned with somenationalfinancialparticipation,orinanevenlesslikely adverse scenario, in all participating coun-tries at once. This approach would require the passingofemergencylegislationinthecountriesin question that would give the Task Force therequired access to information and, if necessary, further intervention rights. Thus, the principle of  fiscal responsibility of the individual memberstates for legacy costs would be preserved to themaximumextentpossibleand,atthesametime,marketparticipantsandthepublicwouldbereas-sured that adequate tools are in place to addressanyeventuality.
 
03
BRUEGEL
POLICY
CONTRIBUTION
Pisani-Ferry,Sapir,VéronandWolff 
WHATKINDOFEUROPEANBANKINGUNION?
1.SeeCihak&Decressin(2007)andVéron(2007).2.SeeMerler&Pisani-Ferry(2012).3.SeeECB(2012)andPisani-Ferry&Wolf(2012).4.SeeforexampleGerlach,Schulz&Wolff(2010).5.SeePisani-Ferry(2012).6.SeeAngeloni&Wolff (2012).7.Seeron(2007)andPosen&Véron(2009).
THECONCEPTOFEUROPEANBANKINGUNIONWASRECENTLY ENDORSED
byEuropeanleadersasacomponentforsolvingtheeurocrisis.Inordertostrengtheneconomicunionandmakeitcommensuratewiththemonetaryunion”,theEuropeanCouncilon23MayaskedpresidentVanRompuyandothertopEuropeanofficialstoidentify“buildingblocks”,amongwhich“amoreintegratedbankingsupervisionandresolution,andacommondepositinsuranceschemeinshort,abankingunion.On19JunetheG20leadersexpressedsupportfor“theintentiontoconsiderconcretestepstowardsamoreintegratedfinancialarchitecture,encompassingbankingsupervision,resolutionandrecapitalization,anddepositinsurance”.Therationaleforabankingunioncomplementingmonetaryunionisstraightforward.Europe’sEconomicandMonetaryUnion(EMU)wasconstructedonthebasisoftwopillars:amonetarypillarwiththeindependentandprice-stabilityorientedEuropeanCentralBank(ECB),andafiscalpillarorientedtowardsfiscaldisciplinewithamodicumofcoordination.Ithasnofinancialpolicycomponentapartfromthebanoncapitalcontrolsandthepromotionofasinglemarketforfinancialservices,bothofwhichapplytothewholeEU,andithasnobankingcomponent,apartfromthosearisingfromtheoperationofmonetarypolicyandthecommonbankingregulationandcommonstandardsondepositinsurance.TheECBitselfhasfewfinancialstabilitycompetences.Evenbeforethecrisistherewerereasonstoquestionwhetherthisbare-bonesmodelwassufficient.Itwasknownthattherewasaninherentcontradictionbetweenpan-Europeanbankingandexclusivenationalresponsibilityforbankcrisisresolution
1
.Recentdevelopmentshaveexposedfurtherweaknesses:First,thepreviouslyintegratedeuro-areafinancialmarkethasenteredaprocessofragmentation.CapitalthatwassupposedtomoveasfreelyacrosscountriesasacrossregionshasstoppedflowingfromNorthtoSouth,whichhasresultedinwithin-EMUsurprisebalance-of-paymentcrises
2
.BanksthatwereEuropeaninquiettimeshavebecomenationalincrisistimesastheydependonnationalgovernmentsforsupport.Furthermore,theyhavebeenencouragedbynationalauthoritiestocutcross-borderlending.Thisisunderstandablefromanationalviewpoint,astaxpayershavelittlereasontopayfortheconsequencesofimprudentlendingtoforeigners,butislethalfortheeuro-areafinancialmarket.Integrationoftheinterbankmarketisontheretreatwithintheeuroarea
3
.This,inturn,hasincreasedtheexposureoftheECBthathasbecomeafinancialintermediaryreplacingtheinterbankmarket.Second,therehassince2008beenastrongcorrelationbetweenbankingandsovereignsolvencycrises.EspeciallybutnotonlyinGreece,Ireland,SpainandItaly,sovereignsolvencyconcernshaveaffectedbanksandbanksolvencyconcernshaveaffectedsovereigns
4
.Thereasonsforthiscorrelationincludeastronghomebiasinthecompositionofbankssovereignbondportfolios,thesovereigns’individualresponsibilityforbailingoutbanks
5
,andtheincreasinglyapparentre-emergenceofcountryrisk
6
.Thistwo-waycorrelationcreatesviciouscirclesthattheECBcannotquell,becauseafederalcentralbankcannotbemandatedtoassistparticularsovereignsandbecausetheECBcannotaddresssolvencyconcernsandstaycommittedtoitsprimarytarget.Third,thecrisishasmadeitincreasinglyclearthatafragmentedapproachtobankingpolicyrendersitmoredifficulttominimiselossestotaxpayers.Assetring-fencingandrisk-shiftingresultincoordinationfailuresthatincreasetheoverallpubliccost
7
.Furthermore,individualcountriesmayeitherbepreventedbyneighboursfromimposinglossesonbondholdersforfearof contagion,aswasthecaseofIrelandinlate2010;oriftheydoimposelosses,theirotherdomesticbanksriskbeingatadisadvantageintheintegratedEuropeanmarket,afactorthatledDenmarktoamenditspolicyframeworktomakeitmorecreditor-friendlyin2011.Thesedevelopmentsunderminethefoundationsofmonetaryunionandcallintoquestionitsveryrationale.TheyexplainwhythebankingunionthemehasemergedasoneofthekeywaystorespondtotheincompletenessofEMU.Centralisingresponsibilityfordepositinsurance,banksupervisionandcrisisresolutionwouldcontributetoitsresiliencebycementingfinancialintegrationandreducingthepotentialfor

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