German Policy Watch

September 20, 2012

Banking Union: Germany on the brakes

• At last week’s informal Ecofin, it became clear that Germany is trying to slow down the process on building an EU Banking Union and to limit the Commission’s (already low) ambitions on the project.
• The stance of the German government is driven by two factors: (i) the specific structure of the German banking system and the political clout of the 1,600 public-sector and cooperative banks; (ii) concerns about the use of German financial resources to support weak banking sectors elsewhere in the euro area.
• In addition, the Bundestag is about to pass a resolution which would further curtail the room for manoeuvre of the government in its negotiations with EU partners.
• Against this background, Banking Union will come later and in a scaled-down form compared to the Commission’s proposals – and will suffer from conceptual defects right from the start.

On September 12, the European Commission presented its proposals for an EU Banking Union. During the discussion at the informal Ecofin and via subsequent statements it became clear that Germany – as well as a few other countries such as the Netherlands and Finland – hold different views on key elements of the proposal. In addition, coalition partners in the Bundestag are working on a resolution that would further curtail the room for manoeuvre of the government in its negotiations with EU partners.

Specifically, Germany is pushing for the following:

• Banking Union should start later and not be rushed.
• EU-level supervision should be limited to the largest, cross-border banks, but should not extend to small, locally active banks.
• Before being put under direct EU-level/ECB supervision, each bank should have undergone yet another stress test to ascertain that it does not harbour any hidden risks.
• Resolution, resolution funds, and deposit guarantee schemes are to remain in national hands with no pooling of these funds at the EU level.
• In the new, to-be-established Supervisory Board at the ECB, voting should not be based on one-country, one-vote, but should be based on weighted voting rules giving large countries (i.e. Germany) more clout, if not veto power. In addition, this Supervisory Board, rather than the ECB’s Governing Council, should have ultimate decision-making power.

The German position is easily explained by two driving factors: (i) the specific structure of the German banking system and the political clout of savings and cooperative banks; (ii) concerns about the use of German financial resources to support weak banking sectors elsewhere in the euro area.

As regards the former, Germany’s banking sector is far more fragmented than any other in the EU with 1,900, mostly small banks. What is more, non-profit-oriented banks – savings banks, Landesbanken, cooperative banks and public-sector promotional banks – account for roughly 50% of total banking assets and enjoy disproportionate political clout.

Savings banks, other public-sector banks and cooperative banks are exerting massive pressure on German politicians to ensure (i) that they will not be subjected to EU-level supervision and (ii) that their guarantee systems are maintained in their current form and not pooled at the EU level. As regards the former, the savings and cooperative banks use the smokescreen argument that it would be inefficient and impractical to have small regional banks supervised by an EU-level authority – disguising that what they really want is a bifurcated regime of supervision which would leave authority to supervise small banks exclusively in national hands. The real political debate therefore will not be about the organisation of banking supervision (i.e. how much day-to-day work is delegated to national authorities), but about whether the EU-level supervisor has the final authority over all banks (as rightly demanded by both the European Commission and the ECB). The outcome of this is unclear at this stage: while finance minister Schäuble has indicated that a compromise could be possible along the lines of giving the EU-level/ECB the final say, the Bundestag may take a harder stance and press for a bifurcated system.

As regards the issue of financial safeguards, Germany’s stance must be understood as reflecting the fear that Banking Union, rather than being an integral design element of a functioning monetary union, is (yet another) ploy by indebted countries to draw on Germany’s financial resources. This explains why both the government and parliament as well as the banking industry are insisting on decisions that limit the risks of such financial transfers in the context of a Banking Union.

Which impact will Germany’s stance have on the outcome of the debate on Banking Union?

• First, it is likely to slow down the process, making it unlikely that the first banks will already come under EU-level supervision by January 2013, as proposed by the Commission.
• Secondly, as a corollary, direct transfers of ESM money to ailing (Spanish) banks will not happen quickly as such transfers are conditional on EU-level supervision being in place.
• Third, Banking Union will remain a torso: instead of a consistent, integrated design, a half-baked system will be established that leaves out crisis management instruments – ignoring the fact that supervision and crisis management are inextricably linked.
• Fourth, EU-level supervision will remain weak and dependent on the support of national supervisors who have little incentive to cooperate or to reveal problems in their banking sectors at an early stage.

Author:
Bernhard Speyer+49 69 910 31735, bernhard.speyer@db.com