A Banking Union Baby Step

Europe’s leaders finally recognized the need to centralize banking supervision, with the ECB taking over responsibility. But, while putting the ECB in charge of banking supervision solves one problem, it creates another: can national authorities still be held responsible for saving banks that they no longer supervise?

BRUSSELS – At the beginning of the financial crisis, it was said that banks were, in Charles Goodhart’s crisp phrase, “international in life, but national in death.” At the time (2008-2009), large international banks had to be rescued by their home countries’ governments when they ran into trouble. But the problem now in Europe is the opposite: banks are “national in life, but European in death.”

In Spain, for example, local savings banks (cajas) financed an outsize real-estate boom. As the boom turned to bust, the losses threatened to overwhelm the capacity of the Spanish state, and the problem became European, because it threatened the very survival of the euro.

The Spanish case is symptomatic of a larger problem. National supervisors always tend to minimize problems at home. Their instinct (and their bureaucratic interest) is to defend their countries’ “national champion” bank(s) abroad.

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