Prominent European leaders expressed optimism about how the much-anticipated banking union would work, but German policymakers made clear that neither the current form of the proposal nor the end-year deadline was going to be reached.
As talks at the IMF meetings in Tokyo were winding down on Saturday, the eurozone’s heavyweights piled pressure on Germany, using words such as “urgency” and “commitment”.
“There is a quite real sense of urgency that is being felt by our counterparts regarding the implementation of the banking union,” French Finance Minister Pierre Moscovici told a press briefing.
Olli Rehn, the European Commissioner for Economic and Monetary Affairs and the euro, said that a “pragmatic solution” would be found for including the non-eurozone banks in a single supervisory mechanism (SSM).
This is the first stage of the European Commission’s proposal, which would put the European Central Bank (ECB) in charge of supervising all banks in the eurozone.
“All EU member states are committed to break the link between banks and sovereigns,” Rehn added.
ECB President Mario Draghi said that national supervisors would still be involved in the supervision mechanism as they will do the actual work, “but the ECB has ultimate responsibility.”
“All EU countries that ask to be part of the SSM can be part of it, making this a common EU project,” he said. “The ECB will the place for regulation but not the actor. We want it to work.”
But German policymakers are unimpressed by the pleas for unity, with Andreas Dombret, a member in the executive board of the Bundesbank, telling Emerging Markets that the supervisory mechanism was important but more clarity will be needed.
“It is important not to create unrealistic expectations with a too ambitious time schedule,” he said. “Quality should not be compromised to the detriment of speed.”
German finance minister Wolfgang Schauble has said Germany needed more details on key elements of the Commission’s banking union proposals before a decision on it is taken.
Before it moves forward on the proposal, Germany needs to ensure that the banking union is not used to pool together the risks taken by banks in different eurozone countries, Dombret said.
Analysts have said that banks in countries like Spain and Ireland have over-extended during the boom years and the volume of non-performing loans has increased rapidly.
“This [banking union] would represent a mutualization of risks through the back door with major fiscal implications,” Dombret said. “Such a step cannot be undertaken without proper democratic legitimization.”
Elke Koenig, the head of German banking regulator BAFIN said a single rule book was needed but that “many matters” were not resolved and they must be clarified soon.
“Banking union is the first step towards fiscal union,” Koenig said. “We have our right foot into the door of fiscal union. The timetable is unrealistic, even though we will get a roadmap by the end of the year.”
It is “a long and winding road to banking union, which we should reach by 2020,” she said.
Citigroup economist Willem Buiter said that the quick creation of the banking union was “essential or the union will not survive.”
“The banking union needs to consist of several elements, including a single supervisor, which is vital to prevent the balkanization of the region’s financial sector, and a resolution-recapitalization fund, which of course would be a measure of last resort.