LONDON — The seemingly endless series of euro zone crises has European officials pushing for a banking union that would watch over and bind together the currency group’s faltering financial institutions.
But on the ground in the euro zone, there seems little appetite for such a compact right now. In fact, banks and their national regulators, anxious about the Greek elections and Spain’s hastily arranged bailout, are behaving more parochially than ever.
That poses a threat to the interbank lending across borders that is crucial to maintaining liquidity — the free flow of money that is the lifeblood of the global financial system.
French and German banks have clamped off much of the lending to their counterparts in Italy and Spain, which in turn are mainly giving loans only to their own debt-strapped governments.
And in Madrid, even after European finance ministers agreed to a €100 billion, or $125 billion, rescue of Spain’s failing banks, the always proud Spanish government is insisting that it — and not Brussels bureaucrats — will take charge of how and where the funds are deployed.
With interbank cooperation at perhaps its lowest level since the creation of the euro currency union, European officials say they are moving toward a broader solution.
Experts warn, though, that what is needed now is not another working paper proposing new levels of euro bureaucracy, but a clear action plan that addresses the root issue: Markets and investors have lost faith in Europe’s ability to regulate its banks.
“Why do you think European banks won’t lend to Spanish banks?” asked Karel Lanoo, chief executive of the Brussels-based Center for European Policy Studies and an expert on bank regulation in Europe. “Because they do not trust Spanish regulators. Has Citigroup stopped lending to California? No — what we need is a single banking supervisor and a single settlement system like in the United States. And we have no time to lose.”
Top officials at the U.S. Treasury and the International Monetary Fund have also been warning for more than a year that until Europe solves its banking problem, there can be no easy resolution to the euro crisis.
Mario Draghi, the head of the European Central Bank in Frankfurt — right now the closest thing the euro zone has to a banking coordinator — said Friday that he and top E.U. officials in Brussels would present a master plan for the euro project in a matter of days.
A blueprint is only that, however. Substantial changes that would affect banks and national budgets would probably require treaty changes and voter approval. That process could take many months and even then have no guarantees for success.
As part of the push, Brussels published proposals earlier this month that would include creation of a Europe-wide banking supervisor whose oversight powers would trump those of local regulators.
And to discourage the flight of bank deposits from weaker countries — a problem that has plagued Greece and now Spain — Brussels proposed a deposit insurance fund for the entire euro zone, analogous to the Federal Deposit Insurance Corp. in the United States. Individual euro zone member nations already have deposit insurance. But the Spanish fund, for one, is nearly insolvent.
Under the Brussels proposal, a new banking regulator would also have the authority to share the financial pain of bank bailouts by forcing some holders of bailed-out banks’ bonds to absorb losses.
To make such changes take effect sooner than formal treaty revisions would allow, Mr. Lanoo of the Center for European Policy Studies has proposed an elegant solution in a recent paper
.
He says there is already an article in the E.U. treaty (Article 127.5, to be exact) that would let the European Central Bank take on supervision of euro zone members’ banks, provided that the finance ministers of the 17 E.U. countries that use the euro approve such a step unanimously. That would be faster than getting the approval of 17 national governments.
And it would be in tune with a global trend of giving central banks ultimate responsibility for bank safety, while giving the E.C.B. the ability to spot and address banking disasters in countries like Ireland and Spain before they become a Europe-wide threat.
But even if support is gathering for greater banking consolidation in Europe, there would be political obstacles.
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