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Banking

High hurdles remain for EU banking union

Everybody wants it, but nobody wants to pay for it. The European banking union is the EU's most important project in years, but will take a long while yet to achieve.

EU finance ministers, meeting in the Lithuanian capital Vilnius are no closer to finding common ground for establishing a European banking union than they were before their last meeting a year ago. Appropriately, the mood in the conference center was as dreary as the weather outside.

What EU Commission President Jose Manuel Barroso has called the EU's most important prestige project, which was set to begin in March of this year, has become the victim of classic EU foot-dragging and is now scheduled for late 2014.

"We will start banking oversight in the fall of next year. It is an ambitious timetable, but doable," said Jörg Asmussen, a German board member at the European Central Bank (ECB). The ECB also still needs to hire some 1,000 finance experts to work for the banking oversight agency at its headquarters in Frankfurt.

Who pays for defunct banks?

 European Central Bank ECB Executive Board Member Joerg Asmussen awaits the start of the session of the Committee on Economic and Monetary Affairs at the European Parliament, in Brussels, Belgium, 08 May 2013. The session of the Committee on Economic and Monetary Affairs is held on the financial assistance to Cyprus. EPA/JULIEN WARNAND +++(c) dpa - Bildfunk+++

Asmussen sees oversight taking another year or more

After drawn-out negotiations, the ECB and the European Parliament finally agreed last Thursday (12.09.2013) to a rule that would oblige the banking oversight agency to regularly report to parliament. Talks continue to revolve around the first pillar of the banking union – oversight of EU banks. The second pillar – joint liquidation of bankrupt banks – is not expected to be fully operative until 2018.

Asmussen emphasized, however, that before stress tests can begin for the EU's 130 largest banks, it first has to be clear where the money will come from to actually liquidate an ailing bank.

EU members continue to argue over the costs, because, understandably, each wants to keep its own national budget out of harm's way. But Asmussen soberly explained that member states still need to move from their current positions considerably. "The [EU financial] crisis showed that the liquidation of cross-border banks was not sufficiently coordinated," he said.

Who decides which banks to close?

Wolfgang Schäuble, Treffen der EU-Finanzminister in Vilnius
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Bild Bernd Riegert, 14. September 2013

For the German finance minister there are still many unresolved issues

One of the biggest sticking points is still the question of who decides which banks to liquidate - especially when the bank has subsidiaries in different EU countries. The EU Commission has proposed itself as the liquidation authority – a move which the ECB supports, but several finance ministers, including Wolfgang Schäuble of Germany, are not prepared to let that power out of their hands. Instead, they want their national supervisory authorities to have the last word on the fate of banks.

What's more, Schäuble wants to keep taxpayer's money out of the equation. In a few years, the EU wants to have a liquidation fund stocked with 60 billion euros ($80 billion) from bank contributions. In Germany, many banks fear that the rescue of ailing banks in southern Europe will be shouldered by their customers. Schäuble has made clear that "responsibility and accountability must lie with the owners and creditors – not with the taxpayers."

'Bomb is not defused'

Auf dem Bild:
Janis Emmanouilidis, European Policy Centre, Think tank, Brüssel, Ökonom, Experte für Währungs- und Wirtschaftpolitik. Aufgenommen 12.09.2013 Brüssel. 
Foto: Bernd Riegert / DW

The financial world is still opaque, says economist Emmanouilidis

Ironically enough, the EU finance ministers met in Vilnius one day before the fifth anniversary of the Lehman Brothers bank collapse – the event that triggered the global financial crisis in the first place and brought on the European debt crises in Ireland, Greece, Portugal, Italy, and Spain.

Although much has changed for the better since then to prevent such crises from happening again, says EU economist Yannis Emmanouilidis, there is still much to worry about. The banking sector has improved, he says, but the world of high finance still includes a shadowy banking sector and hedge funds that handle opaque and high risk financial instruments.

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