Miroslav Singer (Financial Times (ft.com), 9.5.2013)
The proposed European banking union, which would place eurozone banks under the supervision of the European Central Bank, strives to address some of the institutional deficiencies of the eurozone.
This monetary zone features at least the same – and probably a higher – level of national diversity as the US. Consequently, it needs, in principle, tax collection and redistribution channels to be on a similar scale to those in the US.
Yet it is clear that fiscal transfers of a comparable magnitude to the US federal budget are unacceptable to many eurozone constituencies.
The banking union is, therefore, essentially an attempt to build transfer channels that are capable of breaking the harmful relationship between the financial sector and sovereign debt, and acceptable to warier member states, particularly Germany.
To be successful, the union needs to consist of three elements.
First, there must be common supervision to prevent slippage of quality due to national complacencies and/or interests.
Second, risk must be shared – in the form of quasi-fiscal transfer channels, the European Stability Mechanism and potential sharing of national guarantee funds.
Finally, there has to be a common approach to resolving bank collapses and their related costs.
It is worth noting that while common rules are presented as something that is necessary for a banking union, they are in fact necessary for greater unity – in other words, for a common EU market.
Alongside the acceptance of such a scheme, however, there are two obvious problems with the creation of this union within the current eurozone.
The first is how to ensure banking systems are well capitalised across all the eurozone countries. The straightforward solution would be to pool the resources of the northern nations and the ECB. I suspect that was the initial plan, but the clear reluctance of the countries in the north to play along is making this very difficult to achieve.
The second is how to achieve supervision that is of a high enough standard to guarantee that transfers through these newly created quasi-fiscal channels do not trouble the northern member states, rather than creating a fully fledged federal tax system for the eurozone.
While the first problem is hampering the establishment of the banking union, the second needs to be solved if the union is to be sustainable over the long term. I have my doubts about whether a solution can be found to the second problem, as it may require supervision of a standard that has never before been attained.
Hopefully, however, other measures to reduce banking risks, such as stronger buffers, can remedy this situation.
Ultimately, there are three main points to consider.
First, the banking union will benefit mainly the eurozone. The Bulgarian lev or Swedish krona currency zones, for example, do not need it, as they exist within the borders of single nation states.
Second, the combined resources of all the EU countries outside the eurozone will not be sufficient to restore the euro area financial system to health.
Third, for the Czech National Bank, one special feature of our banking system is that while it is restricted to the country’s borders, it is solvent and liquid, and a provider of credit to the eurozone banking system.
Consequently, the Czech National Bank will do its best to support the creation of the banking union while working to eliminate the risk of being pulled into the transfer channels via non-market price transactions and risk sharing.
Our well-capitalised and liquid banks should not be used to fund their parent or sister institutions at rates below the market rate for such funds or assets in a situation where group interests prevail over the interests of subsidiaries in the decision making.
We are not needed in – and do not intend to become a party to – quasi-fiscal transfers, even in crisis situations. In particular, we do not wish to become a party to any common funds or any loan-sharing scheme between deposit guarantee funds or anything with similar redistributive effects.
We are also keen to retain our own domestic controls and regulations as well as the current balance of power in the European Banking Authority. I cannot help but wonder whether the failure of advocates of the banking union to respect the similar positions of many non-eurozone countries are complicating its creation. These negotiations are difficult enough in the eurozone countries alone.
For us, joining the Single Supervisory Mechanism (SSM) would involve a loss of supervisory powers. We see no reason to cede such powers, not least because the Czech National Bank has a strong track record on supervising the domestic financial market, and has been able to maintain good working relations with the relevant Czech supervisory bodies.
What is more, some key pillars of the SSM have not even been drafted yet. We do not feel able to draw any conclusions about the quality of SSM supervision until the system has been up and running for a while.
Ultimately, it is a case of wait and see. We wish the eurozone every success in creating the banking union, but it would be better for us to see how the creation of the SSM works in practice.