The recently passed EU banking union does not achieve its objective

By Claus Rosenkrantz Hansen

A few weeks ago the last details of the banking union that was conceived in the wake of the financial crisis were passed in the European Parliament. The main purpose of the union is to protect EU taxpayers’ money from a banking sector in dire straits as was the case in 2008 when bank bailout packages, financed out of tax revenues, were introduced as a safeguard against bank failures throughout Europe.

Does the banking union then mean that EU tax revenues are safe in the face of future collapses in the banking sector? No, says Georg Ringe, professor of International Commercial Law with CBS Law Department.

“In my opinion the union in its current agreed-on incarnation is unable to handle major incidents. Depositors and short-term creditors enjoy insufficient protection in the event of a collapse, and chances are that the stabilization of large banks will, again, be at the expense of EU taxpayers”, says Georg Ringe.

One weakness in the fabric of the banking union is the so-called Bank Resolution Fund that is intended to come into play whenever a bank is facing a crisis.

The fund is expected to accumulate 55 billion Euros over the next 8 years but that sum will be nowhere near enough to stabilize a crisis-ridden major bank, according to Georg Ringe. Ten times as much, at least, will be needed if a bank such as Danske Bank or Deutsche Bank is facing collapse.

The banks themselves need to come up with buffer capital
To push this point Georg Ringe has co-authored an article with Columbia Law School professor Jeffrey N. Gordon titled “Resolution in the European Banking Union: A Transatlantic Perspective on What It Would Take”.

In the article they propose possible amendments to the European banking union to make it matter and become a viable mechanism for managing financial crises in the banking sector across Europe.

The cornerstone of the proposal is the suggestion that the banks themselves put in place the buffer necessary to overcome future problems. This self-insurance model will make bank bailouts financed by tax revenues superfluous and will render irrelevant the whole idea of a fund that is insufficient anyhow.

“Our proposal is based on the premise that the banks, in the event of a future financial crisis, need to provide their own insurance in the shape of sufficient debt accumulation which, in times of crisis, can be converted into owners’ equity and thus cover any losses. In this way the banks, and not EU tax payers, will carry the cost of recovery winning much more popular support for the banking union across Europe”, Georg Ringe explains.

Precisely support for the banking union is a delicate matter. Cross-border consensus is hard to achieve because it involves a loss of sovereignty and a lot of taxpayers’ money.

The banking union is too important to work at half-strength
A very concrete consequence of the discord is the decision to charge the individual member states with the responsibility to compensate depositors in the event of a bank collapse. Initially this responsibility rested with the banking union but under the current agreement the union is only authorised to order member states to put in place a compensation system.

In Georg Ringe’s opinion it is important to seek popular support for the banking union across the European Union. If the union fails to live up to its purpose a situation similar to the one in 2008, when enormous sums of money were funnelled to the banking sector in the attempt to stabilise large and important European banks, will become a reality.

“Banks of a certain size cannot be allowed to crash without a fight. The consequences will be too severe. The costs are too great – initially for the country in which the bank operates, but also, down the line, for the rest of the European Union. For exactly this reason it is important to create the necessary conditions to be able to save the large banks without relying on taxpayers’ money. To do this requires an efficient banking union”, Georg Ringe explains.