French and German finance ministers keen to pursue EU banking union

(Source: Reuters)

European finance ministers Wolfgang Schäuble of Germany and Pierre Moscovici of France have said that they wish to make progress on a European Union banking union. Moscovici said that the EU must aim to have made "decisive progress" by the end of June.

Schäuble said that the EU should press ahead using current law, rather than implementing new rules through treaty changes. He said that banking union was a "priority project" that should be achieved "quickly".

But the real problem with the Eurozone's banks isn't the lack of a banking union, but the implicit backing of banks - they are considered Too Big To Fail - which creates problems of moral hazard.

Roland Vaubel, professor of economics at the University of Mannheim thinks the plan for a banking union is misguided:

Some justify banking union by referencing the failure of national regulators during the financial crisis. It’s true that they did fail to foresee it. But so did the European Commission – even though it’s responsible for the EU’s internal market. And although multinational banks did pose a problem for regulators, these issues have been handled effectively through bilateral cooperation between them. Would 27 EU members, or a majority among them, have known better?

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Most perniciously, banking union advocates suggest that there should be a level playing field in banking regulation. But there are key reasons not to impose equal conditions on all markets. National banking systems differ, and consequently have different needs. Regulatory competition generates peer pressure and encourages innovation. Further, decentralised supervision helps to diversify regulatory risk.

There is a real danger that Europe will create a level playing field with a very high level of regulation. If decisions are taken by the majority – as is currently the case across much of the EU – the majority of highly-regulated member states have an incentive to impose their regulations on the minority of less regulated member states to reduce the competitiveness of the latter. This is the so-called “strategy of raising rivals’ costs”. A banking union would be no friend of a vibrant market in financial services.

(Full article)