Europe’s latest banking reforms run out of time

Europe’s banking sector continues to be shaken by scandals and failures. German public prosecutors are facing demands to bring charges against the German banking arm of Greensill Capital. Germany’s financial regulator, BaFin, has been humiliated by the 3.5 billion euro Wirecard scandal. Serious money laundering cases involving large banks in many euro zone countries have shaken faith in Europe’s bank regulation and oversight. Fixing this erosion of trust by completing the Banking Union is long overdue. Action is now urgent and essential.
Leaders in the euro zone responded to the 2008-2009 global financial crisis by committing themselves to a banking union that was to include reform of the regulation of the largest banks, action on bank resolution and common deposit insurance for the bloc’s members. The rationale was sound: To ensure future financial and economic stability, the continent needed reforms to strengthen and regulate Europe’s largest banks, which underpin about 70% of lending across the euro zone. Doing so would bring considerable economic benefits, we were assured. Yet more than a decade later the banking union is still unfinished. It’s time to complete the task and make Europe, and her banks, better able to weather future economic storms.
Regulation and supervision in 2021 are centralised within the European Central Bank. Yet this change hasn’t been smooth and today isn’t the success it was meant to be; it’s proving hard to oversee banks across so many cultures and economies. The ECB now has the regulatory responsibility for 119 banks, representing more than 80% of banking assets in the euro zone. But the central bank has fallen short on oversight on many occasions, when the banks and firms are not properly overseen by either the ECB or national regulators. We can see the evidence of this in the scandals in Germany, Estonia and elsewhere. Europe’s unfinished banking union, its regulation reform, and resolution of banks and financial firms have been a disappointment. There are too many instances where national oversight has been too limited, too cozy, and where ECB supervision has not caught failures until too late. In 2021 more needs to be done to ensure the ECB’s authority and ability to act if it detects signals that banks are in trouble.
European governments must stop viewing large banks as ‘their’ national banks that deserve special treatment, and view them instead as the hulking, sometimes systemically risky firms they are, requiring consistent oversight based on European norms and rules. Unfortunately, so long as bank chief executives know they can get special treatment in extremis from their home governments, additional risks and costs can mount. If that happens, the people who have entrusted their savings to these institutions should not bear the cost of those risks.
On deposit insurance, the euro zone has gone part of the way towards a banking union, but not far enough. In 2008-2009 we saw disparate national deposit insurance programs fuel bank runs as customers reacted to the financial crises by shifting money to more generous programs, causing bank runs to spill from one country to another. European leaders have failed to accomplish their goal of a euro zone-wide deposit insurance program. The current system that provides backup to national programs is confusing and inadequate. German and French leaders worry that they will be left paying the bill for bank collapses in other countries. This is shortsighted.

—Bloomberg