1. QNB Economics
economics@qnb.com.qa
21 December 2012
EU Progress towards Banking and Fiscal Union Remains Slow
A meeting of European finance ministers on 13th European sovereign debt crisis. A Eurozone deposit
December yielded agreement on an initial step towards insurance framework is also being advanced but no
a centralised banking union and approved a €37bn formal agreement has been announced.
bailout tranche for Greece. However, a two-day
meeting between European leaders on 14th-15th The driving force behind the banking union is to
December delayed decisions on fiscal union until June increase the stability of Europe’s financial system.
2013. Europe has faced an intrinsic conflict of interest with
national authorities overseeing banks that hold large
On 13th December, EU finance ministers formally amounts of the debt of the national governments. This
appointed the European Central Bank (ECB) to has led to “cosy relationships” between national
oversee the “single supervisory mechanism” (SSM), authorities and their banks with supervisory controls
an initial step towards the banking union. The that are perhaps more lax than they should have been.
agreement will give the ECB powers to take over the Additionally, the single currency made European
direct supervision of banks from national authorities. It banks more interdependent on and exposed to each
is expected to come into force in 2014, although no other, increasing the risk of cross-border financial
deadline has been given. contagion.
The agreement only covers 200 of the 6,000 financial The banking union aims to bolster confidence in
institutions in the Eurozone that were initially Europe’s banks by standardising supervision,
expected to be included. It excludes banks with assets regulations and capital controls and improving
of less than €30bn, or 20% of national GDP. This capacity for crisis management. This should help
leaves most of Germany’s retail banking sector and its lower borrowing costs for banks, particularly in crisis-
politically powerful savings and cooperative banks ridden countries in Europe’s periphery, and should
under the oversight of national authorities, a key also support cross-border lending, easing any liquidity
requirement for Germany’s consent to the plan. issues.
However, the ECB still retains the power to intervene
in any bank, if required, and to deliver instructions to However, the SSM is not as extensive as originally
national supervisors. intended as it excludes a number of smaller banks.
This is a serious shortcoming. As the European
The SSM is intended to provide transparency, rigorous Commission has stated, systemic risks can originate in
oversight and standardised requirements and capital smaller banks and a two-tier system is inherently
ratios across the region’s largest banks. Once the SSM unstable as it encourages depositors and banks to
is enacted it will clear the way for Europe’s €500bn move to the segment that is perceived as safer,
rescue fund to be used to directly recapitalise creating volatility. The implementation of the SSM has
struggling banks without unanimous national approval. also been pushed back from the beginning of 2013 to
According to QNB Group, this is preferable to an undefined date in 2014.
providing the funds through national governments,
which would increase sovereign debt levels. However, According to QNB Group, reform of the European
the SSM will require parliamentary approval from the banking system needs to go hand in hand with fiscal
European Parliament and from some individual reform to support financial stability. To ensure more
member states, notably Germany, which has been sustainable sovereign debt levels, the EU has plans for
reluctant to give up national oversight. greater fiscal union with a joint Eurozone budget and
for binding contracts to enforce economic reform and
The SSM also allows the Eurozone to move to the next budget targets. However, at a European Council
phase of establishing a banking union. This will be to meeting on 14th December, all decisions on these
create a resolution mechanism to deal with winding up possible measures were postponed until June.
failing banks. This would centralise the management
of crisis resolution to ensure that it is swift and Greater fiscal and banking union are fundamental for a
effective, avoiding the slow decision-making of permanent solution to Europe’s sovereign debt issues.
multiple national governments that has drawn out the Although these reforms have been pushed back,
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2. QNB Economics
economics@qnb.com.qa
financial markets have generally responded positively
with the Euro rising to three-month highs against the
dollar, perhaps relieved that some material progress
has been made with the banking union. This may have
helped the Euro recover in mid-December. Also
supporting the Euro was the successful buyback of a
portion of Greece’s sovereign debt, which enabled the
release of a €37bn tranche of bailout funds on 13th
December.
Euros per US Dollar (Nov-Dec 2012)
1.32
1.31
1.30
1.29
1.28
1.27
1.26
04 Nov 12 18 Nov 12 02 Dec 12 16 Dec 12
Source: Global Insight and QNB Group analysis
Although the banking union should enhance the
stability of the European financial system, it could also
lead to stricter regulation. The ECB may enforce more
stringent capital requirements than those currently
enforced by national authorities. This could lead to
further retrenchment and de-leveraging by European
banks, continuing a trend that is currently ongoing.
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