The new Single Bank Resolution Mechanism of the European Union
Stefano Micossi, 30 November 2013
Of the three pillars of the nascent European banking union, establishing a unified bank-resolution mechanism is the most pressing issue. This column suggests some changes to the existing Single Resolution Mechanism proposals. The decision to initiate resolution should be left to the ECB and national resolution authorities. Debt automatically convertible into equity when capital thresholds are violated could partially replace liabilities subject to bail-in. The Single Bank Resolution Fund must be supranational to ensure the credibility of the mechanism.
A banking union in Europe is essential to the long-run stability of the Eurozone (Draghi 2013 ). It will be built on three pillars:
- A single supervisory mechanism.
The necessary regulation for this is already in force.
Topics: EU institutions, Financial markets
Tags: bail-in, bank resolution, banking union
How to limit the ECB’s OMT?
Harald Benink, Harry Huizinga, 12 July 2013
How well has OMT done? This column attempts to temper Mario Draghi’s recent plaudits that “it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times”. Yes, OMT should provide unlimited liquidity to troubled countries, but not at the expense of necessary structural reforms. The ECB should cover Eurozone countries’ current expenditures, but should not pay off all long-term debt holders. That way, capital markets will be disciplined and incentives for implementing economic reforms will be maintained.
Speaking about the Outright Monetary Transactions (OMT) facility during a recent press conference Mario Draghi, ECB President, said that “frankly, when you look at the data, it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times” (Draghi 2013).
Topics: Europe's nations and regions
Tags: banking union, Eurozone crisis, OMT
A banking union for the Eurozone
Giovanni Dell'Ariccia, Rishi Goyal, Petya Koeva-Brooks, Thierry Tressel, 5 April 2013
The crisis has highlighted the need for, and difficulties with, a Eurozone banking union. This column argues that, to make a union, you need three crucial ingredients: common supervision, a single resolution mechanism, and common safety nets. The power to control and the resources to rescue must work in parallel. Eurozone leaders have taken the first critical steps, but further progress is needed to strengthen the financial architecture of the single currency.
Before the crisis, the common currency and single market promoted financial integration. Banks and financial institutions operated with ease across countries; credit went where it was in demand; and portfolios became increasingly more diversified. The interbank market functioned smoothly, and monetary conditions were relatively uniform across the Eurozone.
Topics: EU institutions, EU policies
Tags: banking union, Eurozone crisis, regulation
Europe’s Cyprus blunder and its consequences
Nicolas Véron, 25 March 2013
The Monday morning Eurozone Cyprus bailout is now public, although details are scant. This column argues that this package cancels out some of the mistakes in last week’s package. Last week, the Troika should have vetoed the small-deposit tax and prepared a plan B for the Cypriot parliament’s rejection. Avoiding the risky scenario of a Cyprus exit will require further fiscal commitments from Eurozone partners. One possibility is a temporary, but EZ-wide, 'deposit reinsurance', or backing of national deposit-guarantee schemes by the ESM.
The late Mike Mussa1 noted that “there are three types of financial crises:
- crises of liquidity;
- crises of solvency; and
- crises of stupidity.”
This quip comes to mind when considering the developments of the past ten days around Cyprus.
Topics: EU institutions, Macroeconomic policy
Tags: banking union, Cyprus, deposit guarantees, Eurozone crisis
Winners of a European banking union
Dirk Schoenmaker, Arjen Siegmann, 27 February 2013
So far, discussions around Europe’s prospective banking union have focused only on the supervision of banks. This column argues that policymakers must also think about the resolution of banks in distress. While national governments confine themselves to the domestic effects of a banking failure, a European Resolution Authority could incorporate domestic and cross-border effects. A cost-benefit analysis of a hypothetical resolution of the top 25 European banks shows that the UK, Spain, Sweden, and the Netherlands would be the main winners.
The aim of the prospective banking union is to foster financial stability in Europe. The euro sovereign debt crisis has shown that financial stability cannot be managed effectively at the national level, because of the diabolic loop between national governments and banks (Alter and Schüler 2012).
Topics: EU institutions, EU policies, Europe's nations and regions
Tags: Bailouts, banking union, Eurozone crisis, Netherlands, Spain, Sweden, UK
Mutualisation and constitutionalisation
Harold James, Hans-Werner Sinn, 26 February 2013
Can the euro exist without fiscal or political union? This column draws on the history of the US – especially its assumption of states’ debt after the War of Independence – to investigate which path might best serve the Eurozone. History tells us that unions require a well-constitutionalised system of restraint on fiscal behaviour, both at the federal level and at that of individual states.
It is often claimed – especially but not only by US economists – that the travails of the euro show that it is impossible to have a monetary union in the absence of a political union.
Topics: Economic history, Politics and economics
Tags: banking union, Eurozone crisis, mutualisation, US
Designing a federal bank
Harold James, 18 February 2013
Do economists and policymakers know how to design a federal bank for Europe? Is there a template? This column explores the history of the US Federal Reserve, gleaning lessons for the future of the European banking system. Getting to grips with the historical and empirical details shows how different the two really are. Overall, evidence suggests that the mechanism of the TARGET system might well create demand for Europe to move further towards fiscal federalism.
How centralised should the operation of a central bank be? Central banks were originally created as instruments to facilitate the financial arrangements of unified and centrally directed states, as was the case for the first central banks – in Sweden, England, and France.
Topics: Economic history, EU institutions
Tags: banking union, Eurozone crisis, US Federal Reserve
True independence for the ECB: Triggering power - no more, no less
Markus K Brunnermeier, Hans Gersbach, 20 December 2012
As governments and the EU wring their hands over banking reform, a fragile system remains in place. This column argues that the ECB’s current role undermines its independence. What the Eurozone needs to reduce undue forbearance - while preserving the ECB's independence - is a ‘diarchy’ in which both a newly built Restructuring Authority and the ECB have the power to trigger bank-restructuring.
Governments are hesitating over how to resolve the financial distress of banks, leaving fragile banking structures in place. This problem is particularly pressing in the Eurozone; governments expect the ECB to continue providing cheap funding, undermining the bank’s independence.
Topics: EU institutions, Europe's nations and regions
Tags: banking regulation, banking union, Central Banks, ECB, Eurozone crisis
A blueprint for macroprudential policy in the banking union
Enrico Perotti, 16 December 2012
The crisis has shown how the Eurozone needs instruments to control bank-funding risks, as implementation of the necessary prudential legislation at the EU level has been much postponed. This column argues that the delay creates a precarious situation, especially in the Eurozone where a banking union is been introduced. Currently all liquidity policy is at the national level. Without some form of coordination, this shift all bank funding risk to ultimate ECB support without the Single Supervisory Mechanism having any adequate transition tools.
This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"
Topics: EU institutions, EU policies, Financial markets
Tags: banking union
Macroprudential supervision in banking union
Dirk Schoenmaker, 9 December 2012
Eurozone banking union discussions are full of questions about the scope of Eurozone microprudential bank supervision. Yet, this column argues that there is surprisingly little debate on the macroprudential supervision that is necessary to safeguard the wider European financial system. After all it is macro developments, such as fast rising housing prices, that lie at the heart of the ongoing crisis in Europe. To safeguard the financial system, Eurozone macroprudential tools should be under the ECB, separate from microprudential functions, with input from national central banks when differentiation is necessary.
There is a strong tendency to focus on the stability and soundness of individual banks. Supervisors may thus be bogged down by the details of these banks, while losing sight of emerging imbalances in the wider financial system.
Topics: EU institutions, EU policies, Europe's nations and regions
Tags: banking union, Eurozone crisis, Macroprudential policy