Greek banks are at the centre of the current crisis. They have been surviving only with the help of emergency liquidity from the ECB, and they might soon be forced into another restructuring, or worse. And yet, it is not the banks’ own problems that have led to the massive capital flight over the past few weeks. Rather, it is the political uncertainty surrounding the country and its policymakers. That’s what induces people to queue to withdraw their money.
This problem would have been mitigated had EU policymakers been able to put in place a fully operational banking union by now. A full banking union normally comprises three pillars: joint banking supervision, joint bank resolution, and joint deposit insurance. Not in Europe, though. The current EU setup resembles, at best, a one-legged stool. A Single Supervisory Mechanism (SSM) was eventually agreed, and has been running for a few months now. The second pillar, called Single Resolution Mechanism (SRM), will not be operational before January 2016. The third pillar, an EU-level deposit insurance, will not be forthcoming at all, at least not in the near future.
How would a genuine banking union help Greece?
In short, a true banking union would have disentangled the banks from the sovereign, which would have been very helpful for Greek banks in their current dire situation. But more than that, a true banking union wouldn’t just be helpful for Greek banks, but for the country as a whole. If Greece were to default but the banking system survives, the state economy may contract but it won’t collapse; tourism will not go away because tourists can use the ATMs and their credit cards; the payment system is not at risk. Moreover, a functioning banking union would have created, ex ante, some disciplining of sovereign borrowing because there wouldn’t have been a captive buyer of domestic sovereign debt. A banking union would, in other words, have separated the (business) operation of banking from the (political) calamities of the country.
And so the banking union’s incompleteness and slow set-up emerge as a source of weakness for Greek banks and the entire country. Negotiators on both sides, and in particular those putting the break on the joint deposit insurance, are to blame for this impasse. The problem, of course, is how to deal with the present transition issue. The current thinking appears to be for the European Stability Mechanism (ESM) to swap out the Greek sovereign debt held by the banks for good collateral, in support not of Greece but of the banking union, during this transition period. Such emergency measures do not resolve the deeper structural problems outlined here in the setup of the banking union, however, which remain to be addressed in order to stabilise the Greek banking system on a long-term basis.
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