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18 December 2017

Banking Union: the State of Play

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The push is on to complete Banking Union, writes Graham Bishop, who takes stock of the progress so far and next steps, and recognises that, once the EU27 has completed this huge project, "it is difficult to see an offer of re-shaping it just to meet the wishes of British exceptionalism."

The push is on to complete Banking Union – launched in 2012 in the heat of the euro crisis and seen then as a vital step to save the euro. The importance of the banking system is clear: its total balance sheet is more than 250% of GDP whereas public debt is now less than 90%. Europe’s politicians have not forgotten that public debt used to be “undesirably high” at just 65% of GDP before the financial crash – which forced it by nearly half to a peak of 95% as taxpayers supported “their” banks.

The most recent push came at the European Council meeting of 14/15 December when President Tusk said bluntly “there is no doubt that the first reality check is the completion of the Banking Union, which is both possible and necessary.”Without such progress, talk of Eurozone finance ministers is just day-dreaming. However, the taking of final decisions has had to be postponed to mid-2018 due to the absence of a government in Germany.

The state of play was discussed in some detail at the early December ECOFIN meeting. They reviewed work on the package of banking `risk reduction measures’ originally proposed in November 2016. The Estonian Presidency reported preliminary agreement on a broad range of issues but highlighted the deep divisions on many key points. Progress is also underway at the Parliament with ECON reports on CRD and CRR proposals.

The extreme need to do `something’ about Non-Performing Loans has finally forced business insolvency issues on to the agenda after a decade of prevarication.  Discussion also focussed on the issue of NPLs – heavily reflecting the travails of Italy. The mechanics of the “expected losses” thrown up by IFRS9 coming into force yet the losses being public information - correctly – but only progressively reflected in regulatory capital are bemusing to market participants. But that should not obscure the real progress on the ECB’s push for quick recognition of “new” NPLs and possibly a platform or European “asset management company” to trigger a genuine market.

What has already been achieved? The Commission contributed a “Note Presenting a Stock-take of Financial Reforms”. Together with its three Annexes, the Note is a timely reminder of the scale of what has already been achieved and its 15 pages provide a useful summary as the list is lengthy and covers such massive pieces of legislation as CRD and CRR as well as ground-breaking measures such as BRRD.

The supervisory achievements of the Single Supervisory Mechanism, and those of the even-newer Single Resolution Board, are a reminder of the massive work done to turn into practical reality today ideas that were absolutely unthinkable just a decade ago. 

The Great Financial Crash had its European headquarters in the City of London and has resulted in a re-structuring of the EU’s economic governance rules to give a hugely enhanced role for Eurozone bodies such as the Eurogroup. The talk of a Euro area Finance Minster suggests this part of the integration process still has some way to run. But the banking union is probably on the last lap – with a European Deposit Insurance System as the final prize.  Most City of London dwellers have probably got lost in a welter of acronyms and lost sight of the total picture. As the Brexit negotiation moves to the next stage, it is worth standing back to reflect on that picture.

Reading the Commission’s Note on half a decade of legislation to integrate the EU’s financial systems (and particularly its large banks), it is easy to wonder how the UK will interact with this impressive new structure after Brexit. The UK government is still determined not to be part of the EEA, the single market and the customs union (though the latter is not particularly relevant for the financial world). The EU27 is talking about the Canada CETA deal as a template and Brexit Secretary Davis has responded by calling for a “CETA plus, plus, plus” deal. 

What could this mean? The CETA document is 1,598 pages long with just 230 pages of treaty language and the rest is detailed schedules of tariffs and quotas. Chapter 13 is about financial services and runs to just 14 pages – with 13.16 perhaps the most difficult article for the UK as it is entitled “Prudential carve-out” and provides that “A Party may, for prudential reasons, prohibit a particular financial service or activity.”

Once the EU27 has agonisingly completed its banking union – probably including many more than 19 members, and with much carefully-structured pooling of financial sovereignty for prudential reasons – it is difficult to see an offer of re-shaping it just to meet the wishes of British exceptionalism. Such a wish may collide with firm and oft-repeated EU27 statements about “no cherry-picking”.

© Graham Bishop

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