Fitch: Banking union may fail without big changes

Tim Wallace
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EUROZONE plans for a union-wide banking union need major improvements if they are to work effectively, or even succeed in being implemented at all, credit ratings agency Fitch warned yesterday.

Political leaders want to create a single banking supervisor, probably under the European Central Bank (ECB), with the aim of breaking the damaging link between banks and their national governments.

European Commission president Jose Manuel Barroso believes the plan will boost financial stability and help stop any future repeat of the current crisis.

Fitch analysts praised the idea, saying the ECB’s guidance “could help reinforce financial stability in the sector,” and “it could ensure a consistent application of the rule book and a co-ordinated regulatory response in times of financial crisis.”

But the agency said the plan must be taken much further to have any chance of succeeding.

“Many important details of the planned reforms are still missing,” said managing director Bridget Gandy.

“There is still some risk it won’t happen.”

The research note pointed to the lack of detail on how the union could work, as the plan does not mention any deposit protection scheme or resolution mechanisms.

But the proposals also fail to explain how a single regulator can govern the very varied banking systems across the EU.

“Co-operative banks in France, the Netherlands and Germany often mutually support each other – investors in one can be fully liable for the actions of another,” said Gandy.

“Regulators will have to work out how to take these structures into account.”

“Similarly, they will have to work out risks in each bank, and in different systems when they work on very different models – for example, there is not really a retail mortgage market in Germany, which means banks face very different risks to those in other countries.”

Fitch analysts also backed plans to use the bailout funds to recapitalise troubled banks directly, rather than adding to sovereigns’ debts, saying the plan “could greatly improve the functioning of Economic and Monetary Union”.