The promise and pitfalls of the euro zone’s plan for a banking union

Plan de Europa de una unión de bancos

FOR lack of a child’s tuppence, there was a run on the bank. So goes the tale of the Dawes Tomes Mousley Grubbs Fidelity Fiduciary Bank in “Mary Poppins”, a musical movie classic. These days banks do not rely just on the good name of top-hatted directors. Other defences shore up confidence, including rules, supervision, bank-deposit insurance and government guarantees. But bank failures still take place. This week the French government rescued a century-old mortgage lender, Crédit Immobilier de France, by guaranteeing billions of euros of its debt. This from the Socialist administration of President François Hollande who regards the financial sector to be his “real enemy”.

In contrast with America, which stabilised its financial system relatively quickly after the collapse of Lehman Brothers in 2008, the euro zone’s banks remain fragile. The area’s most troubled countries are suffering a slow run of two sorts in particular: depositors have been pulling money out of banks, and investors have been withdrawing from sovereign bonds. Each panic reinforces the other. Senior Eurocrats sometimes wonder why there has not yet been a real bank run in southern Europe. Were one to start, they fear, it would spread across borders.

To restore calm, Europe’s leaders in June resolved to embark on a “banking union”. On September 12th the European Commission will present proposals for a first element: a new euro-zone supervisor, which is to be an offshoot of the European Central Bank (ECB). Once in place, euro-zone rescue funds could recapitalise ailing banks directly, lifting some of the debt burden from weaker states. This would be an important step in resolving the euro crisis. The core of the bargain—greater mutualisation of risk in exchange for more central control—may be a precedent for a future “fiscal union” in which joint Eurobonds could be issued with tighter controls on national budgets and economic policies.

The new supervisor is an important concession to Germany. So it is odd to hear Berlin complain so loudly about plans to bring all of the euro zone’s 6,000-odd banks within its remit. Germany says the ECB cannot properly supervise so many banks. Better to do a more thorough job on a smaller number of key institutions. But the commission argues that risks come not only from big “systemic” cross-border banks but from smaller ones as well, most recently from Spain’s cajas.

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