November 11, 2013 5:46 pm

Banking union: A good idea, going nowhere

Banking disunion is a self-reinforcing cycle that will prove hard to break

“Private” banking union in Europe is a good idea that is going nowhere. Since the euro’s creation, peripheral banks have never been so crammed with their own sovereigns’ debt – 19 per cent of assets, JPMorgan reckons – and have never held fewer non-domestic government bonds.

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European Central Bank board member Jörg Asmussen wants eurozone banks to head the opposite way. Private union is the novel idea that banks should share more risk throughout the eurozone, by acquiring subsidiaries across borders, lending across borders, and, just maybe, by buying bits of their weaker peers that fail, under ECB supervision.

The idea is likely to remain novel. True, the Americans have a private union. The Federal Deposit Insurance Corporation turned 450 of the 490 bank failures since 2008 into “purchase and assumption” deals involving other banks, many across state lines. The deals were based on FDIC valuations, avoiding inflated book values. But even backed by ECB asset reviews, Euro P&As would require financing precisely when most banks are trying to deleverage.

French banks once ventured across Europe. But look, for example, at BNP Paribas and BNL in Italy, a classic core-periphery banking tie-up made possible by the euro. BNL’s loan book shrank 4.4 per cent in the third quarter, with corporate loans down 8.4 per cent. Other core banks will not be rushing to emulate BNP.

As long as core banks are in no position to add peripheral assets, peripheral banks will become more dependent on their sovereigns and therefore less attractive to outsiders. This cycle will be hard to break, unless growth returns in Italy, Spain and elsewhere. Regulators could help by backstopping peripheral asset purchases, or by forcing more transparency on peripheral banks. The alternative is waiting for the last core bank to retreat behind its home borders.

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