The Eurozone: banking union, bailout union or both?

Financial Services
  • Madrid’s European bailout for the recapitalisation of some of its struggling savings banks last week has given new life to the question of ‘a banking union’ – pooled bank supervision and resolution and pooled depositor protection - in the EU or the Eurozone.
  • European Union member states have profound political reservations about some of the implications of a banking union that are likely to slow its arrival and distort its likely form. Berlin in particular is suspicious of a banking union as an attempt to impose collective liability by the back door.  
  • It is also likely to drive a further wedge between the UK and the rest of the EU. London supports the idea of a banking union but sees no scope for British participation. This will have far reaching consequences for the City of London and will reinforce Britain’s place on the sidelines of major changes in the EU.
  • In reality, two linked kinds of a banking union are needed in the Eurozone. A long term union to supervise its banks and a short term union to save them. Europe probably needs a version of America’s $700bn Troubled Asset Relief Programme (TARP) of 2009 – a multi-billion euro recapitalisation fund that can directly recapitalise banks in place of their already impaired sovereigns.  Both will strain the limits of the politically possible in Europe.

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