European Banking Union - A Big Government Takeover

Trigger

The German Institut der deutschen Wirtschaft (Institute of the German Economy, an industry sponsored economic research institution) just released a study on the European banking union titled “Es geht auch ohne Schulden-Vergemeinschaftung” (in German language, title is somewhat misleading, therefore no translation).

A Hot Topic

How to implement a European Union banking union is a hot topic for some time, but latest since the Financial Crisis of 2008.

Central Planners Busy At Work

To avoid future bailouts of banks and the socializing of such losses, the authors of the above report suggest to create 17 funds for each country and one central European fund to restructure/resolve failed banks. These funds have to be coordinated etc.

The European Central Bank is to supervise only the 120 largest, system relevant banks in the European Monetary Union (EMU). The remaining several thousand banks are to be supervised by national agencies.

First, a central bank should not be tasked with bank supervision for reasons of conflict of interest and others.

Second, the distinction between system relevant (systemic risk) banks and other banks is very controversial. It creates most likely artificial distinctions and distortions. As if other banks could not be the cause of the next financial crisis.

Living Will

Of course, the European central planners love the absurd idea of a living will for banks, which has to be updated every year. Way too much control and costly bureaucracy for private businesses!

Alternatives

Would it not make more sense that governments are committed to reduce their far too high levels of indebtedness to let’s say below 50% of GDP.

Would it not make more sense that government central banks make sure that the key interest rates are never below inflation rate plus productivity growth (or some markup) to prevent or reduce credit booms and speculation.

Of course, these alternatives would require too much self-discipline and restraint from our incompetent  and profligate elected representatives.