The wrong model

The type of banking union imposed by Germany fractures the European financial market

The type of banking union imposed by Germany fractures the European financial market Europe finally has its embryonic banking union but it is highly doubtful whether it will help the markets to regain competitiveness given the structure agreed upon. In basic terms, the accord is a point-by-point agreement with German demands: the sole banking supervisor (the ECB) will only have authority over Europe’s larger financial institutions, those with assets of more than 30 billion euros; and there is to be a strict division within the ECB between its monetary and supervisory functions. Angel Merkel has already told the Bundestag that the deal constitutes a triumph for Germany, but this is the moment when it is important to explain why that German victory could turn out to be a European error in financial terms. At the same time, in political and bureaucratic terms, even such a technically debatable accord may be better than nothing.

The agreement that has emerged from Brussels groups the European banking market in two blocks: the big lenders to be supervised by the ECB and those that have assets of less than 30 billion euros, which will be overseen by national governments. This proposal by German Finance Minister Wolfgang Schäuble is principally designed to disguise the unhealthy state of Germany’s savings banks and regional lenders. The pretext is that the ECB is thus placed on guard against any systemic risk to European finances. But the fact is that smaller entities are also able to turn a national banking system into a toxic one, as has proven to be the case in Spain. This circumstance invalidates the German argument that the national supervision of banks and savings banks is not relevant because it would be Germany which ended up paying for the cleaning up of its own institutions. The danger is not in a collapse as such, but rather the contamination of assets.

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