A banking union in Europe is widely accepted as A Good Thing. Harmonised oversight of lenders and a system of mutualised support is likely to defeat, finally, the vicious feedback loop between banks and sovereigns. That would normalise the funding situation, at least for the national champions in peripheral Europe, and give the smaller ones a leg-up.
But for it to do what is hoped of it, the union needs to be constructed properly. A single rulebook is coming together for Europe’s banks. But the finer details, for example how loans on banks’ books are judged to be non-performing, should also be streamlined. That will take time.
Similarly, the set-up of the ECB needs work. Its own lines of accountability need to be firmed up. And it needs to be adequately staffed to cope with the added responsibility of keeping watch on 6,000 banks — even if it will farm out some of the work to national supervisors.
The European Council wants to move ahead quickly. Last week, President Herman Van Rompuy emphasised that banking union would be a key topic at the council’s summit this Thursday and Friday. Europe is on a “sprint” towards banking union, he said.
The haste is partly to get the architecture in place to bail out Spain’s banks. As it stands, cash from Europe, coming via the European Stability Mechanism, can only be given directly to banks once the single supervisor is in place. Without the ECB as that banking supervisor, Spain’s money for bank recapitalisation would be funnelled through the sovereign, exacerbating its own debt metrics.
But this is a silly, self-imposed rule. It can, and should, be done away with even more quickly than the other “definitely nots” already seen in this crisis. (Did you hear the one about haircuts for Greek bondholders?)
A banking union is a huge undertaking. It is good to make it a priority, but foolish to think it should be rushed through. Rulemakers are taking care over other policy changes affecting Europe’s banks, like capital requirements and recovery and resolution rules, to make sure they get them right.
As with those regulations, a banking union should be a way to strengthen the financial system and defend it against threats that would otherwise form the next crisis. It should not be a hasty muddle-through that merely tries to solve today’s problems, rooted in mistakes made a decade ago.