EU’s flawed banking system

The announcement of the latest EU banking union pact on March 20th was warmly welcomed by EU policymakers and analysts. The Single Resolution Mechanism (SRM) emergency bank bailout fund looks however underfunded and slow, and thus lacks the credibility needed to restore confidence in the Eurozone.

  • There are provisions that leave each member states’ contribution to bailout a foreign bank subject to its Parliament’s approval. A clear gesture to Germany that clearly erodes the confidence the SRM was supposed to inspire.
  • This confidence is also put in question when the private sector is the first in line to take losses, as we learned in the Greek and the Cypriot cases. That will surely scare off investors.
  • The size of the fund remains at €55 – 70 billlion, only large enough to handle a medium sized bank closure (rescuing the Spanish banks, for instance, costed €40 billion).
  • The SRM Regulation will be applicable from 2016, and will thus not ready in time to cover the need for a/various resolution(s) revealed by the coming ECB stress tests. Spain and other member states will be fully responsible for any of their banks that fail the tests.
  • The Commission and the Council have a role in endorsing or objecting to the resolution scheme proposed by the Board. Where one of them objects to it, the Board would have to amend the resolution scheme. It’s EU finance ministers that have the final say on a bank being shut.

The agreement was presented as the EU’s first chance to show member states were ready to cede both sovereignty and cash to a central EU authority. Once again, the EU has proven insufficient. The third ECB stress tests will take place on October 17th. In spite of the accusations of the results downplaying the reality or/and fabricating data, a recent report on The New York Times affirms the tests will be rigorous. The conclusion will therefore be that there are several undercapitalized banks to survive likely defaults, especially in peripheral nations where the authorities lack the means to recapitalize them (or to close them without widespread losses). The report resorts to the “Texas Ratio”, that looks back at the Savings and Loans crisis of the late 1980 and focuses on performance of Texas banks. The ECB has not enough resources to neither rescue nor shut down the aforementioned banks without inflicting widespread losses that would entail – again – a serious loss of confidence in the EU economy.




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