Monday, 4 June 2012

A banking union for Europe

Key conditions from the excellent Wolfgang Munchau

The deposit insurance should have no limits. It is probably best to anchor it at the ECB itself – which would be justifiable if and when the bank recapitalisation facility was big enough. Its goal should be to stop the two types of bank run we are seeing right now. The first is sectoral: a run on weak banks, with money routed to strong banks. The second is geographic: a run on banks in weak peripheral countries, with money routed to core countries. In other words, the deposit insurance not only needs to insure deposits, but the euro value of the deposit even if the country leaves. 

Both schemes require deep institutional change. A joint recapitalisation fund needs a central supervisor with the courage and power to walk into a Spanish bank and close it down. Deposit insurance must be accompanied by a deep political union. Otherwise, it might create moral hazard by encouraging countries to leave the eurozone in safe knowledge of this guarantee. Without a commitment to further political union, deposit insurance is either ineffective or ruinous. Recapitalisation, insurance and joint supervision therefore go together.
So, a proper banking union is a very big deal indeed. 

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