Eurozone leaders must move to establish a banking union to boost markets’ confidence in the 17-country area, according to the head of the organization that represents the world’s largest multinational banks.
Charles Dallara, managing director of the Institute of International Finance (IIF), said they must “move promptly” to form of banking union involving a centralized supervisory authority, region-wide bank deposit insurance and common bank recapitalization funds such as the European Stability Mechanism.
His intervention, in an interview with Emerging Markets, came as a senior former Japanese politician warned that without decisive action Europe would suffer a fresh banking crisis within the next six months to a year that could hit French and German institutions.
Dallara told Emerging Markets: “I think that Europe would be well advised to move promptly toward the development of a unified banking regulatory authority, a unified deposit guarantee [system] and a unified resolution policy mechanism.”
He said that establishing a banking union – which many experts see as an essential part of a wider fiscal and political union – would “realistically” take three to five years project.
“It’s not so much a question of how quickly [this happens]. It’s rather that if [Europe] could agree upon the goal and the time line that would do a lot to demonstrate intent and that would generate a lot of confidence.”
Japan’s former vice finance minister for international affairs, Eisuke Sakakibara, told Emerging Markets that he was not hopeful of an early return to health by European banks and other financial institutions.
“[Europe’s] financial sector is very weak,” he said. “It’s not only a fiscal problem; it’s a complex fiscal and financial problem and I’m afraid that some kind of major banking crisis may take place in Europe within a matter of six months or a year involving French or even German banks.”
This was echoed by vice finance minister for international affairs, Takehiko Nakao, who urged eurozone leaders to “increase their efforts even more” in fiscal and banking areas.
“We would like to see decisive actions and determination by euro area countries and the international community stands ready to work with them,” he said.
The leaders of the three largest eurozone countries – France, Germany and Italy – will join their colleagues from the rest of the G20 in Los Cabos, where they are expected to come under pressure to send a strong signal about their plans to remove uncertainty from the banking system.
As with all recent international summits, Los Cabos is expected to be dominated by the eurozone crisis and it will be a last opportunity for countries such as the US, China and India, which have been hit by the turmoil in euro, to send a message to European leaders ahead of the meeting of the European Council on 28 and 29 June.
Dallara said that there needed to be “clear signals that Europeans are prepared to deal with the immediate pressures they face, in countries such as Greece and Spain particularly.
It is crucial for the “European chapter” of the G20 to signal that the “eurozone will move forward on the plan for fiscal union,” he told Emerging Markets from Washington where the IIF, which speaks on behalf of 450 of the world’s leading financial institutions, is headquartered.