It seems that a European Banking Union has become the magic solution to the eurozone debt crisis. This week’s meeting of eurozone finance ministers in Brussels confirmed that European funds will provide direct support to Spanish banks, to the tune of €100bn in loans from the European Financial Stability Facility and subsequently the European Stability Mechanism.
The aim of the scheme is “to break the vicious circle between banks and sovereigns”, which implies that eurozone governments will no longer be expected to shoulder the burden of bailing out their banks in times of trouble. The debt will not be part of Spain’s government deficit, as no guarantee will be required of Spain, but in return the government will bring in tougher austerity measures, in order to cut borrowing below 3 per cent of GDP by 2014, a one year extension to the current deadline.
The plan is bound to raise a further storm in Germany, where many commentators see it as transferring risk to German taxpayers which should be borne by the shareholders of the banks concerned and their governments. Another challenge for Mrs Merkel!
The first tranche of €30bn will be transferred by the end of July and held by the Spanish government as a contingency. Madrid is committed to wholesale reform of the Spanish banking sector as a whole and major institutions will be “stress-tested” to establish their viability.
Next stage will be the creation of a “single supervisory mechanism” for the banking sector which, once established, would oversee the reform and restructuring of banks. This should be in place by the end of the year, provided that Commission proposals, due in September, can be adopted in time.
Commissioner Michel Barnier has identified the questions this raises in his statement to the Economic and Monetary Affairs Committee of the European Parliament, and he still has a lot to answer. He asks whether the supervisor would replace national authorities or complement them; how the authority can “be open” to all member countries and respect the integrity of the single market; and whether it will oversee all banks, or just international institutions and banks in difficulty. Altogether a list of big questions, and of major significance for the City of London.
There is no doubt that the scandal over the alleged fixing of LIBOR and EURIBOR rates by 20 or more global banks will further strengthen the argument for tougher EU regulation just as Europe is planning for a banking union with common rules. Barnier has lost no time in pressing for legislation which would require false reporting of Libor rates to be made a criminal offence and introduce measures to ensure oversight of the reporting system.
For years the prospect of regulation was fiercely resisted across all financial services at both the national and the European level, and still some pockets of self regulation remain, including the fixing of LIBOR rates, which provide the benchmark for a vast range of financial transactions. How times have changed, when we see the deputy governor of the Bank of England, Paul Tucker, describe the whole scandal as a “cesspit” and tells MPs that “self-certified markets are open to abuse”. It’s not an easy time to be a banker.