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Not about safer banks

Why banks are happy with the European banking union.

The European Commission and a number of member state governments have been making grandiose statements that suggest the new banking union will sharpen the teeth of banking supervision and clear up the mess that has led to insolvencies and costly bailouts. With the European Central Bank (ECB) as the overall supervisor, with ample powers to step in and demand proper remedies to keep banks on a safe track, the EU has finally found the appropriate response to the risks posed by irresponsible banks – or so the proponents claim.1

The rhetoric suggests that the EU is banging its fist on the table in a way that you would think the banks would resent, since the banking world hardly appreciates the authorities telling them how to do business. So why is it that their response is quite the opposite? Why are the banks by and large delighted at the prospect of European supervision and what some see as stronger enforcement of banking regulation? Isn’t all this about curbing irresponsible behavior and making banks pay their own way?

There are a few good reasons for the joyous reception by the banks:

1. Supervision will be based on lax rules

For a start, the key issue about banks is not whether the supervisor is a big institution with loads of computers and educated people in it. The key issue is the rules and regulations the supervisor is trying to safeguard. In this case, the ECB is to ensure the respect for the European version of the international Basel III agreement – mainly a directive on ‘capital requirements’ due to be adopted later this year. Both the international version and the EU approach were heavily influenced by the banking lobby, resulting in a new set of rules that are extremely lax. Importantly, in the EU version the new rules do not include the minimum requirements agreed on in the Basel agreement, but put a ceiling on how much regulators can ask banks to retain in order to keep them safe. A major victory to big banks, and one they have worked hard for.2 The core issue is the fact that the regulation that is to form the basis of ECB banking supervision will be weak. No matter how effectively the ECB supervises the implementation of the rules, it cannot make up for the loopholes that have been deliberately inserted into that legislation. In fact, centralised Eurozone supervision could, in the end, serve to lock in the victory of the banks in the EU battle over the Basel-rules.

2. A banking union is to strengthen the single market

There is certainly nothing to be scared of if you’re a big bank with a daring strategy. This is the kind of approach to banking, the banks have been dreaming of. For years, they have lobbied to get a ‘genuine single market’ in financial services, and EU-level banking regulation and supervision have been high on the wish list, especially now that banking regulation is set to be molded to their liking.

When for instance the Commission considered how to implement the Basel rules, Joseph Ackermann of Deutsche Bank stressed the importance of harmonisation. “National initiatives, based on political pressures from within individual member states are detrimental’ to the Single Market ‘and must be resisted,” Ackermann wrote in a letter in November 2010.3

In view of the success the banks had with their lobbying efforts to water down new regulation (Basel III and the regulation and directive on capital requirements), it’s no wonder they’re calling for centralised and harmonised supervision as well. This has long been seen as a further step towards a single market in banking. As one of the most visible banking lobbyists, Guido Ravoet of the European Banking Federation said when commenting on the new powers to the ECB: “It signals a significant u-turn from national reflexes back to European solutions.”

At the moment, banks are applauding the banking union for exactly that reason – ‘to preserve the integrity of the single market’ as the European Banking Federation says.4 ‘The elements make sense if you think about Europe as a common market,’according to Jürgen Fitschen of Deutsche Bank.5

There are of course differences that will have to be sorted out before the banking union can fall into place, and some of these have roots in diverging interests among groups of banks. British banks are seeking a way to strengthen the single market in the way that suits them, for example, and Germany is trying to ensure specific interests of the state-owned Landesbanken But the overall design of the banking union fits the lobbying agenda of the key players in the world of banking.

3. Not necessarily tougher with the biggest

It’s been argued that a banking union will deal with the problem of the much-too-tender relationship between national regulators and local private banks. For sure, there are loads of cases to illustrate this problem. As when the UK Financial Services Authority (FSA) turned a blind eye to the wild adventures Northern Rock. The then head of the FSA was Callum McCarthy, deeply committed to deregulation and who had spent a good part of his life in the board rooms of big banks, including Barclays.6 A regulator who was too keen on letting banks take care of themselves. But why the assumption that this will somehow automatically change with the ECB in charge? Many ECB officials, including ECB President Mario Draghi, come from the private banking sector. Draghi has spent a good part of his career in banks such as Goldman Sachs, and has for many years been a member of a club of senior private bankers and central bankers, the Group of Thirty, that has advocated self-regulation of the banks at key moments in the past.7There is no reason to expect that the ECB will be tougher with banks, and certainly not with big banks.

4. Resolution schemes: states will still have to cough up

One of the big problems the banking lobby has had with the prospect of a banking union, is the idea debated in Brussels for years to have banks pay for resolution when they go broke. A very tempting idea for tax payers across Europe, most of whom are tired of footing the bill for irresponsible banks, but not the favourite item on the menu for the banks who have just fought a successful battle to keep capital requirements low. The good news for banks is that neither the Council nor the Commission wants to introduce a charge that would make up for the failure with banking regulation. They will remain low, and the final pot of money will fall short of the sum necessary – everyone at the negotiating table knows that. European supervision and harmonised regulation (‘a single rulebook’) is a requirement from some governments, notably the German government, which feels it will have to be prepared to lend more money to the ESM to cover the rest, or to let the ECB clean up the mess somehow. This ‘common fiscal backstop’ has been discussed at Council meetings.8

Safe banks not top of agenda

At the heart of the matter it seems there is no desire to get tough with irresponsible and antisocial banks. If that were the case, then our governments and the Commission would have opted for strong regulation both at the Basel negotiations and later when these were to be transposed into EU legislation. Against this background, all the talk about a banking union as a remedy to the shaky state of European banks seems unconvincing if not hypocritical. Talk about the immense expansion of the competence of the ECB and the strengthening of the single market is sidelining the debate about what kind of regulation is necessary.

That agenda has been successfully pushed by the banking lobby from day one, and it has found the Commission all too happy to oblige. As for the rest of us, we should start thinking about what to do when we see more banks fail, and the banking union is revealed as little more than a new way of funneling public money into their accounts.

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