Don’t hurry; the banking union won’t start tomorrow

Banking union

Now that Mrs Merkel is comfortably back in office, many observers believe she is able to set European integration full steam ahead. Liberals and Euro-sceptics being swept from political scene, she enjoys full freedom of action needing to pay little attention to her own backyard. Expectations run particularly high on Banking Union, seen by many as the driving force in erasing the hurdles preventing the Old Continent from thriving.

Yet, they are prone to be deeply deceived, as Banking Union’s scope is likely to be trimmed down to a mere supervisory exercise. Don’t bet on Germany to embark on any large-scale mutual risk sharing. Direct capitalisation of ailing banks won’t materialise in the foreseeable future, nor will it cover past contingencies. Dreams about breaking up links between financial and sovereign risks are bound to be shelved for a long period to come.

Even common supervision will take longer than expected. The European Banking Authority is frantically working on the single rulebook harmonising prudential standards. But it is far from evident that they could enter into force before mid-2014. Implementation will prove still harder as banks struggle with formidable layers of fresh requirements. Financial virtue being measured by stringent own funding, liquidity and leverage ratios, resilience in this demanding environment will undergo a severe test, lame ducks facing serious difficulties in keeping afloat.

Concern has been voiced that this far reaching discipline might erode European banking’s competitiveness in relation to third countries’ counterparts. While Brussels goes far beyond Basel III, the US is taking a pragmatic and less cumbersome approach. Worse than that. The implementing standards tabled by the EBA may inflict disproportionate costs in forcing to flag divergent criteria for supervision, financial reporting and accounting. Contradictory data stemming from such inconsistent rules will hardly help to upgrade transparency and provide an enhanced hindsight as regards inner solvency. Many footnotes are to be devoted in matching purported discrepancies.

The Asset Quality Review requirements stand as a good example. In drawing a distinction between “good” and “bad” forbearance, it delivers such a narrow definition for credit restructuring that normal banking practices will inevitably fall under suspicion. An unduly tough policy on firms experiencing short-term liquidity gaps might ensue. Not only accounting and supervisory reporting standards fail to ensure consistency. The same applies to the newly cast category of non-performing assets, blatantly encroaching on well-established impaired and default notions.

No wonder the ECB supervision will stay for long in limbo before it can become fully operational. Enforcing the intricate and thorny set of new rules may prove more time consuming than those yearning for the Banking Union envisage. Let’s cross fingers and hope damage to the real economy in terms of tighter credit will be largely subdued, once this regulatory bloat is gradually digested by banking institutions.

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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