The Banking Union: A Paradox and a Reminder
In short the SRM introduces Euro-Zone wide common decision making processes for the resolution of banks. It also entails the establishment of a banking fund, to which private banks are to contribute 55 bn. € in the coming eight years. In the future, using this fund's means for the resolution of ailing banks should avoid the unpopular use of tax payers’ money for winding down banks.
The problem with the Banking Union is the following: It pursues two aims, which are incompatible.
First and foremost, the Banking Union is to decouple banking crises from sovereign debt crises. Indeed, in the past couple of years, banking crises have questioned the creditworthiness a number of Euro-countries. At least Ireland, Spain and Cyprus have proven unable to carry the financial burden caused by them saving domestic banks. By the way: whether today’s SRM-Banking Union solves this problem is not a given. Only a financial backstop for the banking fund at the ESM will be able to ensure this in all cases.
This backstop however obviously renders the Banking Union’s second aim irrelevant. Any ESM-involvement goes at the cost of tax payers, as the ESM’s credibility rests upon public money.
Reminder: Don’t forget about national responsibility
Pleading for some more honesty in the debate, we believe the answer to this dilemma must lie somewhere in the middle. Using the funds for bank resolutions is fine, but once the fund’s means have been fully used, the primary financial responsibility should be with the Member State(s) involved and not with the ESM (and hence with other Member States’ tax payers). Only once that member state has contributed a fair amount to any remaining resolution costs, an ESM contribution can be the instrument of choice.
We believe this is appropriate given that a number of policy decisions regarding banks’ activities (e.g. taxes) remain in the sphere of influence of national governments. The ECB’s banking supervision does not materially change this. With important decisions made on the national level, a main part of the financial responsibility should be so as well.
The charm of this idea is that it will be up to the national government to decide how it distributes those resolution costs: either it favors a substantial bail-in (upsetting investors) or it favors the use of public money (upsetting tax-payers and voters). This latter prospect may cause governments to anticipate the consequences of the policy making in advance.
In its current set-up, the banking union enables national governments to bypass this tricky decision by passing costs directly to tax payers of other member states. For so much mercy however, we see no reason.
Author: Bert Van Roosebeke, cep-Head of Department Financial Markets