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A European banking union

André Sapir: Nicolas, there’s been lots of discussions in recent weeks, especially coming from the ECB, about the creation of a European banking union. What would such a union consist of in you view? Nicolas Véron: There are many different things you can say when you say “banking union”. In my view banking union should […]

By: Date: June 5, 2012 Topic: Banking and capital markets

André Sapir: Nicolas, there’s been lots of discussions in recent weeks, especially coming from the ECB, about the creation of a European banking union. What would such a union consist of in you view?

Nicolas Véron: There are many different things you can say when you say “banking union”. In my view banking union should mean a European framework for banking policy with European meaning more integrated than it is today, something like a federal framework or a quasi federal framework.

Now, banking policy encompasses different instruments. There is supervision, there is crisis management and resolution, there is deposit insurance and of course there is regulation, a set of rules that apply to European banks. We already have fairly unified situation in the EU when it comes to regulation. We have a single rule book or at least an aspiration of a single rule book and this is covered by current legislation. But if you think of supervision, crisis management and resolution and deposit insurance we have very loose coordination or harmonization including through the newly created European banking authority and one of the lessons of the euro crisis is that at least for the eurozone we need more and we need more probably quickly as part of what needs to be a eurozone crisis resolution  

André Sapir: When you are talking about a European banking union, is it really at the EU level or is it specific for the eurozone?

Nicolas Véron: I think it depends on what instrument you have in mind. If you think of deposit insurance I would say yes. I think what we need is a eurozone deposit insurance, ultimately a federal deposit insurance in the eurozone perhaps a more ad hoc mechanism in the first phase to reestablish trust among eurozone depositors as a stop gap measure. If you think of crisis management and bank resolution in the context of the current crisis I think we need an ad hoc mechanism that frankly has to cover the eurozone but may also cover some other countries such as Sweden, Denmark, Poland or other euro plus countries would participate in that temporary framework. If we think of supervision we also could think in euro plus terms perhaps even, someday, including the United Kingdom. Even though the UK doesn’t want to p[participate in the eurozone for any foreseeable future. So, I think that depending on which instruments you’re looking at we may have a slightly different perimeter at least for some time but at least we need a eurozone certainly in the context of the current crisis.

André Sapir: Now, what time framework do we have in mind here? Is this a long project or is this something that could still happen this year?

Nicolas Véron: I think we are talking about different steps and it won’t be completed before several years from now because there are some very deep legislative changes and even political changes, some of which maybe even needing changes in the treaty. But beyond the legal aspect, I think there are some many different things that have to change to have a consistent European framework for banking policy and this will take several years.

I would argue that the first steps have to be very quick because right now we have fast erosion of confidence in the banking system in the eurozone and we have a dysfunctional intra-bank market. So, I would say in terms of reassuring depositors that their deposits are safe and probably the first steps of system-wide restructuring of those banks in need has to happen this year and possibly even in the relatively short horizon of the next few weeks or months without waiting for the end of the year.

André Sapir: If the first steps could still happen this year, do you think could be helpful for the Spanish situation?

Nicolas Véron: Well, first I’m not sure there will be a summer break because the current developments are so serious that I guess at least some of the decision makers will not be able to enjoy much vacation this year. This is a minor collateral damage of a very serious situation right now.

As regard Spain, indeed Spain is a very good example of the noxious connection between the dynamics of sovereign debt and sovereign risk in Europe and the dynamics of the banking sector. Indeed, I think it might be necessary to break that connection through a direct intervention at the European level into the Spanish banking sector. I don’t know exactly in which time horizon and it will also depend on other developments not least what will happen in Greece but I could imagine the necessity of a European intervention directly in to the Spanish banking system which would be indeed a form of embryonic steps towards the banking union because you would have to define a banking policy at the eurozone or European level that currently doesn’t exist.


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