We are getting closer to a European Banking Union, with France pushing hard towards a beginning of 2013 target date, and with Germany still having some doubt on its efficacy and suitability at this moment of European economic crisis. Banks have never had a worse reputation on a global level as people lost confidence in their decision making and risk management capacity. Banks moved away from the traditional banking model of accepting deposits and giving loans, and diversified into investment advice and investment banking. There is nostalgia for a “good banking culture”. They created a separate cycle of financial transactions detached from the exigencies of the real economy, and linked in a high risk manner sovereign debt with bank debt creating dangerous volatility and exposing the sector to its highest level of vulnerability. This topic is amply covered in the papers recently published by DISCERN and the Malta group of Centesimus Annus Pro Pontifice Foundation in a book entitled “Towards Reforming the International Financial Monetary Systems –A comment on the Document published by the Pontifical Council for Justice and Peace”, reproducing the commentary of four Maltese economists during a Roundtable meeting held at Palazzo de Piro in the beginning of the year. (The publication is available from DISCERN). The economists commended the Pontifical Council for Justice and Peace for its clear depiction of the causes of the present financial and economic crisis, but they were less enthusiastic on the recipes given by the Council which included the creation of a “kind of central world bank”. They accepted the importance of stricter supervision of banking on an international level, but believed that this can only realistically happen if it is done gradually and targeting specific monetary zones. The European Banking Union is a case in point.
The overarching reasoning behind the European Banking Union lies in the fact that economic integration in Europe will only happen if there is a banking union. A common supervisory authority over banks in the euro zone would probably have prevented this crisis we are in today. A banking union includes common supervision, a common regulatory framework and a resolution model and a deposit guarantee fund. The European Central Bank (ECB) that has a solid and strong reputation and a record of firmness and propriety is set to be the best institution to help in the recovery of respect in the banking sector.
A number of issues remain however debateable. France would like to move fast and institutionalise the Union as early as January 2013. The Germans’ reply is that of “quality before haste” and although accepting the principle of common supervision, they would like to do this in a gradual manner. Other questions persist: how realistic is it to have all banks supervised by the ECB? Will only super-national banks be supervised by the new Union? Which banks will retain supervision by the local supervisory authority? It is also necessary to separate the monetary policy mandate of the ECB from its supervisory role, so that policy will only be informed by the results of supervision but not influenced by it. It is important that the European Central Bank will not have its main objective of combating inflation in any way disadvantaged or diluted. The clock is ticking, and a number of questions remain unanswered, and banks are keen to regain the trust that they have lost.
Joseph FX Zahra