Devil in the detail as banking union edges ever closer

 

THE BOTTOM LINE:SECURING A deal in Europe to ease the burden of Ireland’s banking debt may be the goal this autumn but the Government should consider the unintended consequences of any conditions attached to such an agreement, regardless of the short-term fix it may bring.

Before the euro bailout funds can take direct stakes in euro zone banks, there must first be a banking union and a common banking supervisor.

This will also require a common deposit guarantee fund and a central authority to deal with failed banks.

Beyond how to structure a union and direct capital injections into banks (or, in the case of the Irish banks, debt-for-equity swaps), the Government will also push for two bespoke solutions for the Irish banks – a means to purge them of yet more unprofitable assets, and a long-term funding line for these assets and the run-down of the failed Irish banks.

It would appear that the single banking supervisor will be centred in some form around the European Central Bank. While the ECB has shown an unprecedented level of support by propping up the Irish banks with a disproportionately large amount of funding, the Frankfurt-based central bank has shown itself to be considerably more flexible to the wants and needs of the bigger euro area countries.

Ireland suffered too long from being too small in the euro club to warrant structural changes to the currency bloc’s rulebook. But problems that were dismissed as failures of an errant member have since emerged among the bigger, higher-standing member states.

The ECB responded to intense funding pressures on Europe’s biggest banks, notably the French banks, late last year by offering €489 billion of three-year credit, at a rate of 1 per cent, under the long-term refinancing operations (LTRO). A further €529 billion was pumped into European banks in a second LTRO lending splurge in February.

Notwithstanding the fact that €1 trillion has done nothing to get the inter-bank lending markets working normally again, similar flexibility for Ireland in November 2010, before the State succumbed to the EU-IMF bailout programme, might have eased the strain on the Irish banks by injecting some much-needed confidence in the markets.

Likewise, the ECB has extended the list of eligible collateral that it will accept in return for its regular funding operations over the past four years as the liquidity crisis spread to the mainstream European banking markets.

Last month’s U-turn at the ECB over burning senior bondholders at banks that are not too big to fail was taken in response to mounting problems in the Spanish banks.

Frankfurt has consistently blocked Ireland from “bailing in” senior unsecured and unguaranteed bondholders in Anglo Irish Bank and Irish Nationwide.

So smaller nations should have concerns now about the evenness of any playing field in a banking union supervised by the ECB.

Then there is the competitive pressure on the Irish financial services sector from the UK, which wants to opt out of any EU alliance that would spread the cost of failed banks across borders and centralise limits on capital requirements set by national regulators.

Any banking union supervised out of Frankfurt that sets rules on the 17 members of the euro area that are more far-reaching than those applied to the 27 EU member states, including UK, could leave Dublin at a distinct disadvantage to London as a financial centre.

Minister for Finance Michael Noonan has already opted out of the core group of EU countries introducing a financial transaction tax as he fears that financial firms in Ireland could relocate to London or Luxembourg.

A banking union must also lead to questions about greater fiscal union across the euro area, which must put the Government on notice about the slope getting all the more slippery towards a common consolidated corporate tax base. This would be even more damaging to Irish economic interests.

A German association representing the country’s biggest banks yesterday called for the ECB to have sole responsibility for regulating euro area banks. This would make the Bundesbank answerable to the ECB.

Given the Bundesbank’s opposition to the sovereign bond-buying that could help fix the euro crisis and the north-south divisions within the euro zone, it’s hard to see German central bankers relinquishing such authority without guarantees that a more powerful ECB would be free of political interference.

There is still so much to protect at local level – both for big and small euro countries – before further powers are ceded to the centre.

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