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Spain’s teetering financial system and fears of a sudden Greek bank run have injected fresh urgency into calls for a shake-up of eurozone banking control, with advocates arguing only a significant overhaul can help cauterise the gathering crisis.
While sweeping bank reform – either to tackle an immediate emergency or provide more long-term stability – was not originally on the agenda of today’s informal summit of European Union leaders in Brussels, senior officials said it was a big feature of preparations and is likely to be addressed, at least on the sidelines.
At issue is how to guarantee the safety of eurozone banks amid growing instability, prompted by fears that a Greek exit from the currency bloc could spark a bank run elsewhere. The talks turn on how to break the link between struggling financial institutions and their cash-strapped sovereigns, which are tasked with rescuing them.
Top figures at the International Monetary Fund and the European Central Bank argue the long term solution lies in a full banking union with common supervisors, backstops and deposit guarantees.
“We need to break the nexus between public finances and the banking sector,” Jörg Asmussen, the German member of the ECB board of governors, told the FT. “We are offering a vision of what the eurozone could look like in 10 years. The current situation in the eurozone has to be solved using the instruments we have now.”
However, ministers from several frontline countries such as Spain, Italy and Ireland want more immediate steps, including allowing the EU’s €500bn bailout fund, the European Stability Mechanism, to inject fresh capital directly into banks.
The fragile state of Greek banks is also forcing European officials to plan for more drastic measures should an emergency arise.
“These issues can’t wait,” said Nicolas Véron of the Bruegel think tank. “Fiscal issues can wait; bank issues are much more market driven. They have their own momentum.”
Many of the proposals face daunting political obstacles, but the possible options are clear.
Empowering EU bailout funds
Under current rules, EU bank aid must be lent to national authorities, which then offer capital to their struggling banks. This provision ensures that conditions are attached to deals – a key demand for Berlin.
But critics say these terms put off states that want to apply, sometimes because of political stigma. The issue has gained new urgency in Spain, where banks face an estimated €100bn shortfall because of a severe property crash. Routing ESM loans through the Spanish government would further undermine the country’s sovereign creditworthiness.
Several governments have pushed for aid to be injected directly to banks instead, saddling the entire eurozone with the cost. “Such decisions, and paying for them, should at least be the responsibility of a Europe-level resolution agency,” said Patrick Honohan, Irish central bank governor.
If the ESM were allowed to lend directly to banks, some European officials believe this may also undermine ECB resistance to offering the fund a credit line, giving the ESM bottomless pockets. The ECB is not allowed to finance sovereigns, but bank stability is part of its legal remit.
New crisis measures
Christine Lagarde, head of the IMF, has called for a facility with the ability to take direct stakes in banks. Control over those equity stakes has already caused problems, however. Money is available to recapitalise Greek banks, but Greece’s lenders are stalling over concerns that a Greek government could misuse its controlling stake.
The alternative is a powerful federal body, established specifically for the crisis, that can intervene independently and manage assets. Mr Véron of Bruegel compares such a body of restructuring specialists to the Swedish Bank Support Authority of the early 1990s.
In addition, Italian officials are urging pan-eurozone deposit guarantee schemes as a short-term way to restore confidence. But national arrangements are so fragmented and diverse that discussions have not gone beyond allowing one national scheme to lend to another.
Long term financial union
The ECB has emerged as the new champion for long term financial integration at eurozone level, acknowledging the limits to what has been achieved at EU level.
“We need to answer the question how the eurozone will look in the future, ten years from now,” said Mr Asmussen. “We need a fiscal union, a financial-markets union, and a democratically legitimated political union to stabilise the European monetary area.”
Such a “financial-market union” would include a eurozone banking supervisor for big cross-border institutions, deposit-guarantee insurance, and a resolution authority with a fund financed by the industry.
Additional reporting by Jamie Smyth in Dublin