The seemingly endless series of euro zone crises has European officials pushing for a banking union that would watch over and bind together the currency group’s faltering financial institutions.
But for Europeans, there seems to be little appetite for such a compact right now. In fact, banks and their national regulators, anxious about the Greek elections and Spain’s hastily arranged bailout, are behaving more parochially than ever.
That poses a threat to the interbank lending across borders that is crucial to maintaining liquidity — the free flow of money that is the lifeblood of the global financial system.
French and German banks have clamped off much of the lending to their counterparts in Italy and Spain, which in turn are primarily giving loans to their own debt-laden governments.
And in Madrid, even after European finance ministers agreed to a 100 billion euro, or $125 billion, rescue of Spain’s failing banks, the always proud Spanish government is insisting that it — and not Brussels bureaucrats — will take charge of how and where the funds are deployed.
With interbank cooperation at perhaps its lowest level since the creation of the euro currency union, European officials say they are moving toward a broader solution.
Experts warn, though, that what is needed now is not another working paper proposing new levels of euro bureaucracy, but a clear action plan that addresses the root issue: markets and investors have lost faith in Europe’s ability to regulate its banks.
“Why do you think European banks won’t lend to Spanish banks?” asked Karel Lannoo, chief executive of the Brussels-based Center for European Policy Studies and an expert on bank regulation in Europe. “Because they do not trust Spanish regulators.
Has Citigroup stopped lending to California? No. What we need is a single banking supervisor and a single settlement system like in the United States. And we have no time to lose.”
Top officials at the United States Treasury and the International Monetary Fund have also been warning for more than a year that there can be no easy resolution to the euro crisis until Europe solves its banking problem.
Mario Draghi, the head of the European Central Bank in Frankfurt — right now the closest thing the euro zone has to a banking coordinator — said Friday that he and top European Union officials in Brussels would present a master plan for the euro project in a matter of days.
A blueprint is only that, however. Substantial changes that would affect banks and national budgets would probably require treaty changes and voter approval. That process could take many months and there is no guarantee of success.
As part of the push, the European Commission published proposals this month that would include creation of a Europe-wide banking supervisor whose oversight powers would trump those of local regulators.
And to discourage the flight of bank deposits from weaker countries, a problem that has plagued Greece and now Spain, the European Commission proposed a deposit insurance fund for the entire euro zone, analogous to the Federal Deposit Insurance Corporation in the United States.
Individual euro zone member nations already have deposit insurance. But the Spanish fund, for one, is nearly insolvent. Under the Brussels proposal, a new banking regulator would also have the authority to share the financial pain of bank bailouts by forcing some holders of the bonds of bailed-out banks to absorb losses.
Hoping to impose such changes sooner than formal treaty revisions would allow, Mr. Lannoo of the Center for European Policy Studies proposed an elegant solution in a recent paper.
He says there is already an article in the European Union treaty (Article 127.5, to be exact) that would let the European Central Bank take on supervision of euro zone members’ banks, provided that the finance ministers of the 17 countries that use the euro approve such a step unanimously.
That would be faster than getting the approval of 17 national governments. And it would be in tune with a global trend of giving central banks ultimate responsibility for bank safety, while giving the European Central Bank the ability to spot and address banking disasters in countries like Ireland and Spain before they become a Europe-wide threat.
But even if support was gathering for greater banking consolidation in Europe, there would be political obstacles.
nytimes.com
But for Europeans, there seems to be little appetite for such a compact right now. In fact, banks and their national regulators, anxious about the Greek elections and Spain’s hastily arranged bailout, are behaving more parochially than ever.
That poses a threat to the interbank lending across borders that is crucial to maintaining liquidity — the free flow of money that is the lifeblood of the global financial system.
French and German banks have clamped off much of the lending to their counterparts in Italy and Spain, which in turn are primarily giving loans to their own debt-laden governments.
And in Madrid, even after European finance ministers agreed to a 100 billion euro, or $125 billion, rescue of Spain’s failing banks, the always proud Spanish government is insisting that it — and not Brussels bureaucrats — will take charge of how and where the funds are deployed.
With interbank cooperation at perhaps its lowest level since the creation of the euro currency union, European officials say they are moving toward a broader solution.
Experts warn, though, that what is needed now is not another working paper proposing new levels of euro bureaucracy, but a clear action plan that addresses the root issue: markets and investors have lost faith in Europe’s ability to regulate its banks.
“Why do you think European banks won’t lend to Spanish banks?” asked Karel Lannoo, chief executive of the Brussels-based Center for European Policy Studies and an expert on bank regulation in Europe. “Because they do not trust Spanish regulators.
Has Citigroup stopped lending to California? No. What we need is a single banking supervisor and a single settlement system like in the United States. And we have no time to lose.”
Top officials at the United States Treasury and the International Monetary Fund have also been warning for more than a year that there can be no easy resolution to the euro crisis until Europe solves its banking problem.
Mario Draghi, the head of the European Central Bank in Frankfurt — right now the closest thing the euro zone has to a banking coordinator — said Friday that he and top European Union officials in Brussels would present a master plan for the euro project in a matter of days.
A blueprint is only that, however. Substantial changes that would affect banks and national budgets would probably require treaty changes and voter approval. That process could take many months and there is no guarantee of success.
As part of the push, the European Commission published proposals this month that would include creation of a Europe-wide banking supervisor whose oversight powers would trump those of local regulators.
And to discourage the flight of bank deposits from weaker countries, a problem that has plagued Greece and now Spain, the European Commission proposed a deposit insurance fund for the entire euro zone, analogous to the Federal Deposit Insurance Corporation in the United States.
Individual euro zone member nations already have deposit insurance. But the Spanish fund, for one, is nearly insolvent. Under the Brussels proposal, a new banking regulator would also have the authority to share the financial pain of bank bailouts by forcing some holders of the bonds of bailed-out banks to absorb losses.
Hoping to impose such changes sooner than formal treaty revisions would allow, Mr. Lannoo of the Center for European Policy Studies proposed an elegant solution in a recent paper.
He says there is already an article in the European Union treaty (Article 127.5, to be exact) that would let the European Central Bank take on supervision of euro zone members’ banks, provided that the finance ministers of the 17 countries that use the euro approve such a step unanimously.
That would be faster than getting the approval of 17 national governments. And it would be in tune with a global trend of giving central banks ultimate responsibility for bank safety, while giving the European Central Bank the ability to spot and address banking disasters in countries like Ireland and Spain before they become a Europe-wide threat.
But even if support was gathering for greater banking consolidation in Europe, there would be political obstacles.
nytimes.com
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