Single bank supervisor a big step in right direction
Even after three Greek bailouts, tottering Spanish banks, years of painful austerity, and countless make-or-break summits, Europe never seemed to be able to confront the inevitable choice between further integration and eventual dissipation. On December 13, however, it chose the former by signing a deal that gives the European Central Bank (ECB) supervision over the biggest banks in the monetary union—banks with over 30 billion euros in assets and banks, whose balance sheets account for over 20% of a nation’s GDP. This concession to Germany, to keep thousands of smaller banks under national regulators was matched with a concession to France that, if need be, the ECB could step in to regulate the smaller banks as well. This marks yet another decisive step in Europe’s march towards getting it right, a move that began in September with Mario Draghi vowing to do bond purchases to prevent the euro from collapsing to; a few weeks later, the German Constitutional Court okaying the European Stability Mechanism (ESM) with a proviso that raising Germany’s contribution beyond 190 bn euro—given Germany’s paid up capital is just 22 bn euro so far, the chances of this happening are low—will need explicit Parliament approval.
Theoretically, this means the ESM can now utilise its 700 bn euro firepower (including about 200bn euro left over from the EFSF) to directly recapitalise banks in trouble, to break the link between troubled banks and sovereigns—the direct capital to banks was contingent upon a single banking regulator getting put in place. The firepower, however, could prove inadequate should the economic situation not improve—Spain’s debt is 730 bn euro and Italy’s has crossed 2 tn euro. Things have improved in Europe—wage rates have lowered relative to Germany in many countries, Portugal’s budget deficit more than halved since the crisis began and bond yields have remained low in even crisis PIIGS since September. But a lot remains wide open. With France getting downgraded (its debt is around 1.8 tn euro), the ESM also got downgraded from Aaa to Aa1 with a negative outlook, and Mario Monti resigning in Italy—debt yields in Italy rose 0.3 ppt immediately—shows the situation remains quite volatile. The task ahead includes getting common deposit insurance as well as a way to ensure that sick local banks actually get shut down in the face of resistance from local authorities including in Germany. Nonetheless,