ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

strength in numbers

The implementation of a European banking union could help to ensure long-term stability in the region, but opinions are divided about its potential.


Proponents claim the scheme is a crucial element in breaking the “vicious circle” between sovereign debt and bank debt, as well as aligning standards of supervision, and strengthening the banking sector.
Yet despite significant political impetus behind the proposals, European Union member states have so far failed to resolve their differences on the plan. So how likely is it that the union will be implemented in its proposed form? And what does the initiative herald for the future of EU financial services regulation?

Talk of a banking union gathered momentum in June, when the European Commission revealed it had begun discussions with the presidents of the European Council, the Eurogroup and the European Central Bank (ECB), and that a single regulator overseeing banks in all 27 EU states could be in place as early as January 2013. The proposals were fleshed-out later the same month in the European Council report, ‘Towards a Genuine Economic and Monetary Union’ (see boxout).

The document calls for the development of four “essential building blocks” during the next decade, to ensure “long-term stability and prosperity in the European Monetary Union”.

Supervisory timetable


In relation to the first building block – “an integrated financial framework” – the report proposes several measures: the establishment of a single supervisory mechanism (SSM) hosted by the ECB, covering the eurozone and open to all EU member states; a common resolution authority “with an appropriate backstop”; and national deposit guarantee schemes built on common standards.

But while European leaders agreed a timetable for the SSM in October, enabling the ECB to begin its supervisory role in 2013, the proposals are contentious. In particular, Germany is reportedly reluctant to cede regulatory control of its banks. The country’s extensive network of small lenders means that it has more banks than the UK, France and Italy combined – but its total bank assets are just one-third of the size (see graphs). Suggestions from Berlin that only “systemically-important” institutions should come under the auspices of the ECB have met with stiff resistance from France and the ECB itself.

Other hurdles include Swedish concerns that EU treaties are incompatible with the reforms and should be renegotiated – a process that could add years to the implementation timetable – and worries that legal constraints will make it hard to split the ECB’s monetary and supervisory roles.

Consequences of delay

The risk that negotiations could grind to a complete halt prompted Emilio Botín, the 78-year old chairman of Banco Santander, to write a strongly-worded article for the Financial Times, in which he set out the consequences of delaying action. “Europe has been the cornerstone of western society, but if we do not act with speed and determination, we run the risk of being swept into decline and irrelevance,” he warned.

“There is no turning back from the euro or from further European integration. There is no plan B. More integration requires a banking union that includes common supervision, unified rules and a common deposit guarantee fund and resolution model.”

Professional investors agree a banking union is necessary, particularly in relation to the introduction of a common deposit guarantee. Guy de Blonay, a financial sector specialist at Jupiter Asset Management, and deputy manager of the group’s Global Financials Sicav, notes Outright Monetary Transactions – the unlimited bond-buying programme unveiled by the ECB in September – has effectively backstopped deposits at the sovereign debt market level, but says a permanent solution must be put in place.

“It would convince savers their money is safe, regardless of the sovereignty of their domestic government,” de Blonay explains. “And, in turn, it would also help banks access one of the cheapest sources of long-term funding, and prevent bank-runs across the periphery.”


Would you only focus on the major banks? Well, it is not the major ones that are causing the difficulties – it is actually the smaller ones that are bankrupt alt=''

Guy de Blonay
fund manager, Jupiter AM

George Barrow, a financials analyst on Polar Capital’s Dublin-domiciled Financial Opportunities Fund, expresses a similar view. “There needs to be a deposit guarantee scheme, if there is not to be the transfer of deposits from the periphery to the core. This would allow people to treat a euro in Portugal the same as if it was in Germany. At the moment, we are seeing continued deposit flight, which makes it difficult for banks to deleverage successfully. [Spanish banks have] high loan to deposit [ratios], even though there is little loan growth, because of that deposit flight,” he adds.

Varied opinion


Investors have mixed views on the effectiveness of some aspects of the proposals, however. For example, Jeroen Vetter,a managing partner at Capital-Guards – which in November merged with Amstelveen-based Persist Global Wealth Management, to create one of the Netherlands’ largest independent asset managers – welcomes the idea of a single bank supervisor.

“Banks such as ING are financial conglomerates which go far beyond the supervision of the Dutch national bank,” Vetter notes. “Their activities are international, and nobody is looking at the business as a whole. So I think you need something even stronger than a European banking union – you need a global banking union.”

In contrast, de Blonay argues that regulating the eurozone’s estimated 6,000 banks is unmanageable for a single supervisor. “It would be impossible to implement this properly,” de Blonay says. “And would you only focus on the major banks? Well, it is not the major ones that are causing the difficulties – it is actually the multitude of smaller ones that are bankrupt out there.”

There is also uncertainty on how quickly a banking union could be put in place. Barrow says the SSM is unlikely to be up and running before the second half of 2013 – rather than in January, as planned. And according to Vetter and de Blonay, a fully-fledged union could be years, rather than months, away.

Potential sticking point

For de Blonay, the key stumbling block will be German resistance to the idea of guaranteeing deposits in the eurozone periphery, while Vetter forecasts controversy around regulatory arbitrage.

“It will be a nightmare,” Vetter says. “Every country has its own interests. The UK will probably say: ‘we do not want to be in your banking union’. A Scandinavian bank could then move to the UK, to become a British bank. The banking union is a good thing, but it is a political initiative. And to implement it in a way that it does what it is supposed to do will, I think, take at least a decade.”


•Supporters of the proposed EU banking union say the structure is necessary to end the link between sovereign debt and bank debt.

•However, EU member states have failed to reach agreement on several crucial issues, including the scope of the single supervisory mechanism.

•Investors welcome the proposals but warn that they could take years to put in place.

As to what the banking union may herald for EU regulation, investors say the creation of a common financial services supervisor would be both logical and desirable. Vetter adds that the further standardisation of rules across the region is of key importance. He notes the disparities between the fund regimes of different EU countries, for example, and says member states will eventually have to give up some of their sovereignty, if they want a properly-functioning single market in financial services.

“Nobody wants to give more power to Brussels,” Vetter says. “But then the question is, how can you make progress? Ultimately, if you want to have a union and cross-border product distribution, you should have one set of rules.”