Finance: Research, Policy and Anecdotes

Banking union at three

The events of the last weeks – first the take-over of Banco Popular by Santander in Spain and then the bad-bank-good-bank solution for two smaller banks in Italy can be seen as first test for the young banking union in the Eurozone.  In a new Vox column I assess these first tests.  The title summarizes my opinion: a toddler with tantrums.  More specifically:

 

  • The case of Banco Popular has shown that SSM and SRM can work well – quick intervention, quick resolution, no taxpayer money. One-nil for the banking union.
  • The case of Italian banks has shown that it is naïve to think that taxpayer money will never ever again be used – there are situations where this is necessary. In this specific case, it should have been done much earlier. No winners here, only losers – the banks and their equity and junior bondholders, the Italian government, and the banking union.
  • The case of the Italian banks has also shown that a crisis should be cleaned up first before imposing a new regulatory regime.  Clean the field before starting the game.
  • Finally, both cases show that we are still far away from a Eurozone-wide financial banking system, which both complicates the completion of a Eurozone-wide safety net and a complete cut of the bank-sovereign deadly embrace.  It will take more than a common regulatory regime and supervision and resolution framework to get there.
  • Italy is a problem and will continue to be for some time coming (continuous banking problems, sovereign indebtedness, and political uncertainty). As the past weeks have shown, the future of the Eurozone might very well go through Italy.