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Winners and Losers

Europe’s Banking Union: the Big Fix?

by TOM GILL

Last month, MEPs finally signed off on European banking union. This, we are told, is the big fix to the out of control banking system that caused the 2008 economic meltdown that has rocked Europe ever since.

We are told that whereas in the United States regulators and the central bank took swift acted to stem bank problems, the patchwork of national interests across Europe prevented countries from forging a united front to do the same. But this is all to change with a ‘union’ and the clean-up of banks’ books.

A new European authority will have the power to wind up or restructure failing banks – the so-called Single Resolution Mechanism (SRM). And a common fund, financed by bank levies, will be established so that emergency cash can be injected into failing banks. The scheme introduces new rules making it easier to make bondholders and even large depositors of failing banks pick up losses. There will also be an obligation for countries to ensure that schemes are in place to guarantee the first 100,000 euros (82,496.41 pounds) in any savings account.

“The banking union completes the economic and monetary union, puts an end to the era of massive bail-outs and ensures taxpayers will no longer foot the bill when banks face difficulties,” Michel Barnier the European official in charge of regulation stated.

A shiny new future, in short. Should we believe him? First of all, just check out the language of Martin Schulz, the European Parliament’s president. He said: “From now on, taxpayers will not systematically foot the bill for bank losses.” ‘Systematically’ is the word to focus on. As Reuters writes, ‘the conundrum of what to do if a very large bank wobbles remains.’

The reality is that the common fund of 55 billion euros is tiny. Compare that to the balance sheet of France’s ‘too-big-to-fail’ BNP Paribas of two trillion euros. And the reality is we don’t know the health of Europe’s banks. So called ‘stress tests’ are only going to be finalised in October and one key indicator –  bad or non-performing loans not covered by capital  - makes up about a third of the equity across the 20 banks. In the cases of three banks bad debts not provided for exceeded their total equity. In January, one broker report showed 27 of the ECB’s 128 banks failing a simulated stress test, although it is the case that banks set aside tens of billions of euros last year, through raising cash or hoarding profits.

As Raquel Garrido of France’s Front de Gauche, puts it, the common fund is ‘hoax’. Its creation, as with the other elements of banking union, were all done in a mad rush – a perfect excuse to dodge a proper democratic debate. It was absolutely essential to get it done and dusted before the European elections, its proponents argued. However, it turns out that this crucial fund won’t be fully financed for eight years to come. That will be 14 years after the financial crash.

Then there’s the matter that it will be the ECB that will directly oversee the banking union, supervising the eurozone’s biggest banks, with powers to overrule national authorities. That’s the central bank headed by Mario Draghi, the former employee of Goldman Sachs, the investment bank whose chequered history includes a bit of creative accounting to help Greece get into the Euro (and in the process saddling the country with a few extra billion euros of debt).

Handing over such powers to the ECB also means governments relinquishing to unelected officials in Frankfurt yet more control over their financial sector, over the credit needed to keep the wheels of their economies going and people in jobs. What Reuters calls ‘political meddling’ over decisions on shutting banks. This will be particularly damaging to southern European countries. Their weaker banking systems face being taken over by France and Germany, and its financial giants, Deutsche Bank or BNP Paribas, entrenching their position as colonies of the richer north.

And who will be the winners in all this?

Well the same lot that we discover benefited from as much as $300 billion in implicit public subsidies four years after the global financial crisis because governments’ made it quite clear to investors that they would not let them fail, the IMF has recently estimated. That’s right, we are talking about the Eurozone’s big banks, the ones that since 2008 have also enjoyed one billion euros in free money (1% interest rate loans) from the European Central Bank under its Long Term Financing Operation and 4.6 billion euros in state aid.

Corporate Europe Observatory explains:

“[Banking Union] is a guarantee that the single market for financial services is not only protected, but deepened. The adopted rules on banks provide a higher level of harmonisation, making it difficult for member states to impose tougher demands on their banks. To big banks, such a harmonised set of rules makes it easier for them to expand, as they offer predictability.

“The battle of the banking union was never really an open political battle fought in public. The issue is probably too complicated for most. Consequently, the lobbyists of the banks have had a relatively open field in the process. Under the banner of ‘strengthening the single market’, they have seen the banking union as an opportunity to enhance their opportunities, while keeping the concessions to a minimum. In that, they’ve been successful, and can look forward to an era where they can continue with the same behaviour on financial markets, and in the end have the authorities clear up their mess.”

And the losers?

As MEP Philippe Lamberts of the Green Party puts it: “Too big to fail banks are simply too dangerous to exist. As long as systemic financial institutions are allowed to exist in their current shape, taxpayers will remain exposed to paying for the follies of a runaway financial industry.”

But EU governments and the Commission have long dodged calls to separate their investment activities (speculative) from retail (useful, traditional lending to main street). A heavily watered down plan to separate them out will only be put on the table for discussion next year and assuming it is approved, will be implemented in 2017, nine years after the crash and all those promises to crack down on the bankster-speculators. The big banks “vast scale” is “blamed for fuelling risky trading and growth in the multi-trillion dollar derivatives market” but the proposed new rules “signal that European policymakers have largely backed down in the face of banking resistance,” Reuters reports.

So should we believe Monsieur Barnier? On one thing which will be most dear to his heart, as a European commissioner, we can take him at his word. Banking union is a further step down the road to EU integration and a power grab by Brussels and Frankfurt. The question is, will the people benefit? You know the answer to that one.

Tom Gill blogs at www.revolting-europe.com