Banking union is ‘tricky’ says Nowotny

Banking union is ‘tricky’ says Nowotny

By Barry Wood and Antonia Oprita

A roadmap for the eurozone’s banking union is likely to be set by the end of the year, but “European Central Bank (ECB) regulation of banks won’t come into effect until the middle of 2013 at the earliest,” Ewald Nowotny, Austrian central bank governor, told Emerging Markets.

The biggest task in achieving banking union is “sequencing,” and “establishing clear universal rules for the biggest EU banks,” Nowotny said in an interview yesterday.

The European Commission unveiled the proposals to create a banking union in the eurozone last month, setting itself the objective of starting it by the end of the year.

France is pushing strongly for the banking union, which would make the ECB the main supervisor for financial institutions for the eurozone, while Germany opposes it saying more time to assess the details is needed.

Some countries outside the eurozone have rejected the Commission’s proposal on the same grounds. Nowotny said distinguishing between non-eurozone banks and eurozone banks was a “tricky” problem. He cited the example of Poland, where 70% of the country’s banks are headquartered in eurozone nations.

Since proposed ECB regulation applies the subsidiaries of eurozone-based banks, “this would mean that most Polish banks would be regulated from the eurozone even though Poland is not a member and thus has no vote,” he said.

Polish Finance Minister Jacek Rostowski has told Emerging Markets that his country was not opposed to the union in principle but it took issue with the ECB as a single supervisor as it raised questions over its democratic accountancy.

Klaus Regling, the newly installed chief of the European Stability Mechanism, said that intense efforts were underway to overcome the “design flaws” that were overlooked when the euro was launched, but the biggest problem was still the issue of the banking union, with no consensus in sight.

“Common eurozone or EU deposit insurance,” he said, “is the most complicated issue” now being discussed.

While markets seemed to be calmed recently by the ECB’s pledge to buy three-year bonds from countries that go to the ESM for a rescue and by the banking union proposal, perma-bear investor Marc Faber said more drastical measures were needed to fix Europe’s banking system.

“I’m very sceptical of all these supervisory boards and institutions,” Faber told Emerging Markets. “Under their nose the financial crisis happened. If you have banks that fail, let them fail.”

Separating the banks’ investment banking operations from those of retail is a good idea, he said. “If I have a deposit with a bank, I wouldn’t expect the bank to speculate with it. Banks have a social duty as well” as they manage people’s money he said. “I would split the traditional banking function and farm out speculative activity in a separate entity and shareholders can choose what they want to buy.”

The collapse of Lehman in 2008 caused such havoc in the global economy that governments have tried to ensure no big bank fails, to avoid pushing the world into a depression, but Faber said the issue of too big to fail banks must be sorted. “If one investment bank can threaten to bankrupt the system, something is wrong with the system,” he said.