By Sean Carney (wsj.com 19.6.2012)
Enacting so-called European “banking union” proposals may not prevent runs on banks or strengthen the financial architecture of the 27-member European Union, but could further undermine the bloc’s financial market woes and lead to a federalized Europe, the Czech central bank’s vice-governor said.
The European Commission earlier this month presented new bank resolution and recovery legislation, while there’s a broader, more general call from various policy makers for Europe’s financial markets to take responsibility for one another. Together, they are commonly referred to as banking union proposals.
“Those who are talking about the banking union should be fair and open and say that they are talking about a full-fledged fiscal union. It’s not just merging the financial systems together–what it really means is that you’re mixing the fiscal sovereigns into one pot,” Mojmir Hampl said in an interview.
At hand are two separate but related issues aimed at stemming the crisis that has seen de facto defaults of sovereign debt in Greece and Portugal and led to financial sector meltdowns requiring bailouts in Spain and Ireland.
Mr. Hampl, a critic of deeper European integration who echoes some views of Czech president Vaclav Klaus, Europe’s leading euroskeptic, on Friday said it’s unrealistic to expect the EU to create a banking union without a fiscal union.
German Chancellor Angela Merkel, who often has the last word in Europe’s rescue efforts, has said she doesn’t support the banking union proposals without stronger political ties to ensure potential participants coordinate policy.
These proposals aim to unify European banking rules while spreading risk beyond individual countries in the broader European Union.
“This half-baked [EC] proposal doesn’t solve the really big picture and it doesn’t seem to be the case that we’ll have a real game changer. These half-baked measures mean that for stable systems there will be new risks rather than mitigation of existing ones,” Mr. Hampl said.
If Europe does decide to mutualise risk, it would make it easier to spread contagion from troubled and illiquid banking systems to the healthier parts of Europe’s economy, he said.
“In medicine you don’t proceed like this. If you’ve got a problem somewhere, you try to stop the contagion so the whole body doesn’t become infected. This is not the way to heal these financial ills,” Mr. Hampl said.
Mr. Hampl said the proposals appear to be limited not just to the financial sector, but would also impact “quasi-fiscal institutions” like deposit guarantee or resolution schemes.
If the banking union proposals garner traction, “we are heading toward establishing a single state,” Mr. Hampl said.
“I understand these ideas, but if you want this system to be really functioning, it should be presented frankly and openly that you are talking about a completely different political architecture in Europe, not only about a banking union,” he said.
The EC’s current proposal doesn’t preserve existing necessary safeguards that central banks employ to maintain healthy capital levels in local banking sectors, and Mr. Hampl said the proposal would eliminate existing safeguards.
Efforts to mutualise risk would make it “very easy, much easier than today” for banks to draw liquidity and assets away from healthy subsidiaries to support other companies abroad, potentially leaving the subsidiaries in a weakened position with a reduced cash cushion.
“This proposal opens the door to uncontrolled outflows of liquidity and assets,” Mr. Hampl said.
What would be best for countries like the Czech Republic that already have healthy financial sectors, said Mr. Hampl, is not to weaken protections but to bolster the ability of central banks to block outflow of liquidity and to limit commercial banks’ ability to use assets from one subsidiary to prop up another in a different jurisdiction.
Apropos, the Czech central bank Tuesday announced that it has just tightened its rules, halving how much exposure foreign-owned domestic banks can have towards their parent companies. Banks are also required to inform the central bank of credit risk toward members of the same commercial banking group that are equal to 1% or more of its total assets.
The previous level at which banks had to inform the central bank of exposure to a group’s credit risk was 2% of a bank’s assets.
When asked how Europe, specifically the euro zone, could resolve its debt and liquidity woes, Mr. Hampl said that heavily indebted governments and their creditors need to agree to write off some or all sovereign debt. After that decision, they can start discussing whether this step would be easier within or outside the currency union, he said.
http://blogs.wsj.com/emergingeurope/2012/06/19/czech-banker-warns-against-banking-union-for-europe/