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Millennium Post

Euro banks unite to compete

The European Commission has sanctified an agreement among finance ministers of the 27-nation EU for placing some 200 large and systemically important banks under a single supervisn and rules, the larger European banks and eventually all banks in Europe, will have to work under same rules and regulations. This thus paves way to banking integration of the continent.

The decisions appears to have been an offshoot of the financial sector development in the advanced countries since the 2008 melt-down and the following government debt crisis. The financial melt-down had exposed the kind of risks and instability that the evolving structures of the global financial system could generate. Subsequently, the government debt crisis brought out the vulnerabilities of banks to strains in public debts of sovereign nations.  These leave an imprint on banks because of their holdings of government debts.

The new agreement creates a new bail-out fund for recapitalisation of the European banks by allowing the permanent bail-out fund of the Eurozone to be used for recapitalising large banks in distress. This will prevent such banks for collapsing or end in failures. These are very important steps for giving fresh stability to European banking system.

Formally called the single supervisory mechanism (SSM) this should however be seen not against banking integration alone. This is part of Europe’s response to the existential threat to the Union itself. The economic crisis in Europe, the sovereign debt crisis culminated in the euro currency crisis.

To resolve these all encompassing crises, the European Union Council president had developed the concept of a genuine economic and monetary union. The four elements of the union were banking union, fiscal union, economic union, and political union.         

Thus, all banks in Europe will now have to follow the same rules and anyone found to be in default could be directly tackled by the European Central Bank. It is not however immediately clear how the authorities of the national central banks will be compromised with the supra national supervisory mechanism.

Will the German Bundesbank or Bank of France will become redundant authorities under the new mechanism. There will surely be conflict of jurisdiction and authority.

After all, a major function of the national central banks is to supervise the functioning of banks under its fiat. Besides, there might also be conflict of national interests.

The issues involved here are deep. A banking union cannot be successful without a real fiscal union since many of the support facilities can become meaningful or be created without the backing of the fiscal authorities of the constituent countries.  

That these are real issues and not only contrived can be gauged from the fact that German Chancellor Angela Merkel has already stated that the new mechanism and its functioning must not put additional burden on the tax payers.

But then, to be successful the kind of sheer financial muscle power that must back the supervisory mechanism has to be substantially large. Where is the source of funds?

The simple option would be to tap the national fiscal authorities or alternatively the banking and financial sector must cough up the funds for creation of the corpus. The moment that is imposed on the European banking system, there will be cry about it becoming uncompetitive since such obligations will not devolve on competing banking system like that of the United States or China.

Besides, United Kingdom, although a major player in the EU, has specifically chosen to remain outside the supervisory mechanism, thereby keeping a big chunk of the European financial system, and some of the biggest players, outside the single supervisory mechanism. This will be a major limitation to the authority of the European supervisory system. What will happen in case there are some critical developments in the British financial system having major implications for their continental counterparts? After all, problems of contagion happen because of closer operational relations. Is UK system so far isolated from European continental players that the two do not matter to each other?

Does India have any implications from these developments? As such, not directly. However, since EU is a major trade partner and relations are growing stronger, these developments shall have some bearing on India’s financial links with the continent and EU banks.

Besides, when Indian banks and financial institutions seek operational rights, just as EU banks and FIs operate in this country, the rules will have relevance. More particularly, when we are actively working for a comprehensive free trade and economic co-operation agreement with the EU, these developments should be looked at carefully. (IPA)
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