The creation of a European Banking Union was seen as one of the key responses to the Eurozone crisis. But despite being agreed in 2012, the banking union remains incomplete. Tobias Tesche assesses the progress that has been made so far, writing that the banking union has so far failed to deliver on its promises

Tesche, Tobias

LSE Research Online

Europe’s	Banking	Union:	What	progress	has	beenmade?The	creation	of	a	European	Banking	Union	was	seen	as	one	of	the	key	responses	to	the	Eurozonecrisis.	But	despite	being	agreed	in	2012,	the	banking	union	remains	incomplete.	Tobias	Tescheassesses	the	progress	that	has	been	made	so	far,	writing	that	the	banking	union	has	so	far	failed	todeliver	on	its	promises.Frankfurt	skyline,	Credit:	Frank	Friedrichs	(CC	BY-NC-ND	2.0)Over	five	years	after	the	Eurozone’s	heads	of	state	and	government	decided	to	move	forward	with	the	creation	ofa	banking	union	at	the	Euro	Area	Summit	in	June	2012,	the	new	supervisory	architecture	has	yet	to	deliver	on	itspromises.Three	goals	were	put	forward	regarding	the	creation	of	a	European	supervisory	and	resolution	mechanism.	First,to	end	the	era	of	taxpayer-funded	bank	bailouts	and	the	principle	of	organisations	being	‘too	big	to	fail’.	Second,to	break	the	sovereign-bank	nexus	(the	vicious	circle	through	which	rising	sovereign	refinancing	costs	feed	onhigher	bank	funding	costs	and	vice	versa).	And	third,	to	create	banks	with	a	truly	European	ownership	structure	tospread	the	risk	in	case	of	failure.	So	far,	only	marginal	progress	has	been	achieved	with	each	of	the	three.‘Too	big	to	fail’	is	still	alive	and	wellThe	Italian	saga	of	the	insolvent	Veneto	Banca	and	Banca	Popolare	di	Vicenza,	whose	liquidation	entailedsubstantial	amounts	of	state	aid,	has	shown	that	taxpayer-funded	bailouts	are	here	to	stay.Even	though	bank	creditors	must	bear	a	substantial	part	of	the	burden	under	the	new	Bank	Recovery	andResolution	Directive	(BRRD),	there	is	still	legal	wiggle	room	for	the	state	to	become	involved.	As	the	full	extent	ofthe	Italian	non-performing	loans	(NPLs)	problem	became	apparent,	the	main	task	quickly	became	to	haltcontagion	and	shield	‘too	big	to	fail’	banks	such	as	UniCredit.A	difficult	trade	offLSE European Politics and Policy (EUROPP) Blog: Europe’s Banking Union: What progress has been made? Page 1 of 3		Date originally posted: 2017-11-03Permalink: http://blogs.lse.ac.uk/europpblog/2017/11/03/europes-banking-union-what-progress-has-been-made/Blog homepage: http://blogs.lse.ac.uk/europpblog/In	the	absence	of	a	European	safe	asset	that	banks	can	hold	on	their	balance	sheet,	the	Single	SupervisoryMechanism	(SSM)	faces	a	difficult	trade-off.	If	banks	are	forced	to	reduce	their	‘home	bias’	through	sovereignexposure	limits,	this	might	raise	the	sovereign’s	funding	costs	and	reinvigorate	the	Eurozone	crisis.However,	if	the	treatment	of	sovereign	bonds	as	risk-free	assets	is	continued,	banks	will	continue	to	stock	up	onhigh-yielding	bonds	irrespective	of	financial	stability	concerns.	To	permanently	break	the	negative	feedback	loopbetween	the	banks	and	their	sovereigns,	it	is	necessary	to	tackle	this	decisive	question	in	the	medium	term.So	far,	national	champions	are	the	winnersThe	European	banking	union	held	out	the	prospect	of	changing	the	dynamics	of	mergers	and	acquisitions	in	thebanking	system.	In	the	pre-banking	union	era,	national	supervisors	often	prevented	foreign	take-overs	to	shieldtheir	‘national	champions’	from	competition.	If	these	protectionist	impulses	could	be	stopped,	truly	Europeanbanks	could	be	created	through	cross-border	mergers	and	acquisitions,	introducing	an	additional	element	of	risk-sharing	into	the	Eurozone	governance	architecture.However,	this	promise	has	been	left	unfulfilled.	Thus	far,	banking	consolidation	seems	to	have	achieved	thereverse	effect,	leading	to	re-nationalisation	and	higher	banking	concentration.	This	is	evident	in	the	most	recenttake-over	of	Banco	Popular	by	Santander.	In	sum,	rather	than	creating	a	level	playing	field,	the	banking	union	hascrowded	out	the	most	fragile	banks	with	the	large	players	snatching	up	their	good	assets.‘Completing’	the	banking	union	seems	ever	more	likelyWhen	talking	about	‘completing’	the	banking	union,	pundits	often	refer	to	the	third	missing	pillar	–	a	EuropeanDeposit	Insurance	Scheme	(EDIS).	Germany	has	blocked	the	creation	of	an	EDIS	on	the	grounds	that	it	wouldcreate	the	much-despised	‘transfer	union’.	But	the	often-repeated	German	mantra	that	‘risk-reduction	has	toprecede	risk-sharing’	seems	to	have	softened	lately.	Slight	progress	has	also	been	made	in	addressing	non-performing	loan	problems	and	other	so-called	‘legacy	issues’,	increasing	the	likelihood	that	the	new	Germangovernment	will	give	up	its	reluctance	to	establish	an	EDIS.On	the	other	hand,	the	appeal	of	banking	union	will	be	strengthened	before	the	UK	formally	exits	the	EU	in	2019.Shoring	up	the	banking	union’s	resilience	will	not	only	give	the	EU-27	a	better	bargaining	position	in	the	Brexitnegotiations,	but	will	also	make	it	more	likely	that	large	cross-border	banks	will	relocate	their	headquarters	fromLondon	to	the	Eurozone.	The	centripetal	forces	of	the	banking	union	were	on	display	recently	when	the	Swedishbank	Nordea	decided	to	relocate	their	headquarters	to	Helsinki	to	be	supervised	by	the	SSM.	The	move	is	goingto	increase	the	pressure	on	non-euro	member	states	to	enter	into	close	co-operation	with	the	SSM.A	Franco-German	trade-off	over	the	euroThe	election	of	Emmanuel	Macron	has	given	further	impetus	to	the	EMU	reform	agenda.	The	‘Merkel-Macron’trade-off	appears	straightforward:	if	Paris	delivers	on	fiscal	discipline	and	structural	reforms,	Berlin	will	give	thegreen	light	for	deepening	EMU.	The	prevailing	sentiment	in	Germany	is	that	everything	needs	to	be	done	to	helpMacron	succeed	with	his	reform	agenda	to	avoid	Marine	Le	Pen	securing	the	presidency	in	2022.In	his	State	of	the	Union	address,	Jean-Claude	Juncker	presented	a	plethora	of	reform	proposals,	including	thecreation	of	a	fully-fledged	European	Monetary	Fund	(EMF),	a	euro	area	budget,	and	a	European	finance	andeconomy	minister.	However,	as	Daniel	Gros	of	the	Brussels-based	Think	Tank	CEPS	has	pointed	out,	theseproposals	lack	substance	if	they	are	not	matched	by	an	additional	transfer	of	competences	to	the	European	level.Furthermore,	it	is	unclear	how	any	of	the	proposals	are	going	to	help	achieve	the	unfulfilled	promises	of	thebanking	union.	With	regards	to	the	crucial	third	pillar,	Juncker	simply	stated	that	in	order	‘to	get	access	to	acommon	deposit	insurance	scheme	you	first	need	to	do	your	homework’.Please	read	our	comments	policy	before	commenting.Note:	This	article	gives	the	views	of	the	author,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	theLondon	School	of	Economics.LSE European Politics and Policy (EUROPP) Blog: Europe’s Banking Union: What progress has been made? Page 2 of 3		Date originally posted: 2017-11-03Permalink: http://blogs.lse.ac.uk/europpblog/2017/11/03/europes-banking-union-what-progress-has-been-made/Blog homepage: http://blogs.lse.ac.uk/europpblog/_________________________________About	the	authorTobias	Tesche	–	European	University	InstituteTobias	Tesche	is	a	Researcher	at	the	European	University	Institute	in	Florence.	His	research	dealswith	the	European	banking	union	and	the	political	economy	of	central	banking.	He	is	on	Twitter@tobias_tescheLSE European Politics and Policy (EUROPP) Blog: Europe’s Banking Union: What progress has been made? Page 3 of 3		Date originally posted: 2017-11-03Permalink: http://blogs.lse.ac.uk/europpblog/2017/11/03/europes-banking-union-what-progress-has-been-made/Blog homepage: http://blogs.lse.ac.uk/europpblog/

Europe's Banking Union: what progress has been made?

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