Farewell to a sound Banking Union?

Most observers harshly criticize the Babel-like resolution panel involving authorities from 18 Euro countries, plus a handful of independent members, plus the Commission, the final saying on busting a hopeless bank resting on Finance Ministers. Political compromise will prevail over any trace of objective appraisal.

The backstop also comes under fierce attack. Financed through bank levies, it will take up to 10 years to meet its 55 billion target. In the interim period, each country will have to cope with its home troubled entities. Breaking the link between sovereign and financial risk, hailed as the major Banking Union goal, would fail to fly. Especially considering that such a fund would merely amount to 0.2% of the overall balance sheets it must shoulder.

No one can claim the agreement stands as a hallmark of excellence and fine craftsmanship. It amounts to a rather shabby outcome taking on board both the Southern countries desire to enforce a common resolution authority and the stubborn German insistence on avoiding at all costs shifting the bill to taxpayers.

Yet, rubberstamping a fat European backstop would have run contrary to the key principles the Banking Union stands for. Providing a generous publicly-backed shelter for rescuing distressed banks fails to deliver the necessary discipline in business running. Should taxpayers foot the bill for failure there would be few incentives to refrain from engaging into dangerous territory. Shareholders and those lending their money to reckless bankers should bear the brunt if a collapse ensues. Otherwise, the price for indulging in excessive risks would fail to materialise.

Europe must face the prospect that desperately trying to salvage lame ducks beyond any reasonable hope of recovery leads to blatant ineffiency. Severing the link between public bonds and financial risks is better served should dead entities be entitled to a funeral service instead of fresh public money. Responsibility for rescuing troubled banks should rest on the healthy ones. You can bet on them for making good use of wreckage assets.

Germany rightly thinks the Banking Union safety net was intended as a disguised financial support through the backdoor. By slamming that door, it has shattered hopes of getting rid of home problems by transferring them to affluent neighbours.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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