Grand Illusion Behind Europe’s Banking Union

Alpe Adria
Owners of debt in the nationalized Hypo Alpe-Adria bank face steep losses, said Austria's finance minister this week.
  • Why it matters

    Why it matters

    Under current conditions, failing banks cannot be bailed out without massive harm to the markets, says the author.

  • Facts


    • In November 2014, the European Central Bank took over supervision of 130 “system-relevant” banks in the euro zone with a total balance of €22 billion ($24.7 billion).
    • The single resolution mechanism includes a common fund for ailing banks.
    • The resolution program can only be launched if the European Union Commission and finance ministers agree, opening the door for political opposition.
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If the euro zone wants to survive as a currency union, it will have to be more deeply integrated – and a stable banking union is indispensable.

One huge problem now is the tenuous link between the financial sector and national governments.

In crises, governments save their banks from bankruptcy and incur debts. Then they borrow by issuing government bonds – largely through the same banks they saved. That connection is why the national supervisory practice has completely failed up to now. It has no chance of bailing out big banks without throwing financial markets and the economy into turmoil.

Europe needs a sustainable solution for a banking union. It could follow the U.S. model – the Federal Deposit Insurance Corp. – which has long been responsible for watching over banks in financial trouble. Unlike in Europe, if a bank closes in the United States, the FDIC takes over and “switches off the lights.”

But what would a strong banking union in the euro zone look like?

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