The banking union alone cannot bring recovery by Christian Odendahl
The banking union, two years after its inception, is still a work in progress. In another financial crisis, it is debatable whether a truly European approach would prevail over a partly national response; and the process of decoupling banks from the solvency of their governments is far from complete. Overall, however, the banking union is a significant step. The blame for the faltering recovery in the eurozone should be directed elsewhere.
There are three objectives for the banking union. The first is to break the vicious loop between banks and sovereigns. If banks get into trouble in the future, taxpayers should be spared as much as possible. Likewise, banks should properly diversify their assets across the eurozone (and beyond), rather than load up on their home government’s bonds and thereby risk being dragged down if the state’s solvency is in doubt. With the Single Resolution Mechanism (SRM) and the Bank Recovery and Resolution Directive (BRRD) agreed, the resolution of a bank in trouble will have to rely to a much larger extent than before on bail-ins of equity- and bond-holders. A common resolution fund, building up to €55 billion over eight years, is supposed to help in cases where public money is needed. The problem is that policy-makers have overdone the bail-in and underfunded the resolution fund.
In times of crisis, a wall of money to arrest panic can be more useful than a sudden bail-in. The reason is that market panic over the value of bank bonds, even if unjustified, can destabilise the whole system. The ECB’s OMT programme, which arrested bond market panic in 2012, is a good example of what a wall can do. This is not to say that taxpayers should bail out investors. A large resolution fund just ensures that panic does not destabilise the banking system, which would lead to even larger costs for taxpayers, and banks in trouble could be resolved in an orderly manner to the extent that is possible. With the current setup, national ad hoc measure might prevail in a systemic crisis. Progress on diversifying the banks’ holdings of domestic sovereign debt has been slow, because policy-makers are worried that a sell-off by domestic banks would push up government funding costs. The ECB’s current asset quality review (AQR), however, will test the resilience of banks