Published by the Corporate Europe Observatory in January 2014
We reproduce here the Conclusions of this exhaustive study into the new EU “Banking Union”. The original can be read here
Though the banking union is an ambitious project, it is not particularly promising.
Bankers, Commissioners, politicians and governments have depicted the banking union as a solution to all ills of the banking sector. But while in principle, a system that would in the end ensure orderly resolution of banks seems like a brilliant idea, the outline of the EU banking union holds little promise. It will not secure the banking sector against future crisis, it will not put an end to costly public bail-outs, and it will not make the accompanying austerity measures history. Rather, it is set to perpetuate two of the major ills of EU politics today: costly bailouts of banks and the imposition of austerity measures.
The Achilles heel of the banking union is the weakness of EU regulation of banks. At the root of the problem lies the lack of political will to deal effectively with banks that are too big to fail, a banking system that is highly interconnected, and very complex. Despite the dire warning of the financial crisis and the eurocrisis, the new rules amount to little more than an adjustment, not a fundamental reform. This leaves us with megabanks of a type that cannot simply be allowed to sink, and as a consequence, a costly system is to be erected to serve as a safety net.
To the banks, the banking union is much more than the safety net of the resolution mechanism. It’s a guarantee that the single market for financial services is not only protected, but deepened. The adopted rules on banks provide a higher level of harmonisation, making it difficult for member states to impose tougher demands on their banks. To big banks, such a harmonised set of rules makes it easier for them to expand, as they offer predictability. Hence their support to the Single Supervisory Mechanism, which entrusts supervision of the biggest banks to the ECB.
The Single Resolution Mechanism too, seems tailored to the demands of the biggest banks. The bail-in tools exempt the most speculative instruments, OTC derivatives, and one of the tools, the sale of assets, could even exacerbate the problem for the future, as big banks go on a shopping spree when buying assets of former competitors at a time when their price could be well below their real value, allowing them to grow even bigger.
The promise of the banking union was to end or minimise public bailouts and let the financial sector pick up the bill for resolution of banks. That will hardly be the case. While it seems certain that shareholders and creditors will take a hit of at least 8 percent of a banks’ liabilities, that would still leave a lot to be covered, presumably. Some might find optimism in the fact that the financial sector will be made to pay a total of 55 billion euro to a “Single Resolution Fund”, but such a sum will hardly do the trick. It seems inevitable that more public money will be handed over to save the banks.
The battle of the banking union was never really an open political battle fought in public. The issue is probably too complicated for most. Consequently, the lobbyists of the banks have had a relatively open field in the process. Under the banner of “strengthening the single market”, they have seen the banking union as an opportunity to enhance their opportunities, while keeping the concessions to a minimum. In that, they’ve been successful, and can look forward to an era where they can continue with the same behaviour on financial markets, and in the end have the authorities clear up their mess.
This bodes ill for the public purse, and it’s also at the centre of the ongoing political dispute inside the Council over the banking union. For what would be the political implications if we are looking at a future where all governments pay a share of the bailouts of big banks of other member states? The likely response will be to further strengthen the rules on economic and fiscal policies even more. In the political context of present day Europe, it’s hard to imagine member state governments offering generous support to other member states financial sectors with no further ado. Money will be met with political conditionality, and as a consequence, the banking union will no doubt be followed by demands for further central control of member states’ budgets and economic policies.
In sum, the banking union is not a step away from public nurturing of big banks, and it’s not a step away from the imposition of austerity that followed in the wake of the crisis. In fact, it rather looks as if the banking union will seal the status quo and perpetuate the link between irresponsible speculative behaviour of banks and the misery of the majority.