Banking Disunion

BARCELONA – The line of credit to Spain from fellow eurozone governments may help to stabilize a fragile banking system, at least in the short term, but it is a missed opportunity. Spain’s banking crisis provides a perfect opening to move towards a European banking union.

In the medium term, help to Spain will merely reinforce the link between the sovereign and the banks’ problems, causing even greater fragmentation in the European banking market and pushing Spain closer to potential insolvency by increasing its debt burden. By contrast, a direct equity stake in Spanish banks taken by an appropriate eurozone investment vehicle would decouple bank and sovereign risk. It would represent a decisive step toward unified European banking supervision, which could imply easier liquidation of non-viable institutions.

Such a move would also contribute to banking integration if the equity stakes were eventually sold in an open EU-wide auction. The issue is whether such a vehicle, and the appropriate control mechanisms for assisted banks, can be established in a short time frame.

A banking union is a necessary condition for survival of a monetary union that is unable to implement a strict no-bailout policy for member countries. Such a union should be understood as a centralized bank supervisor, resolution authority (RA), and deposit insurance fund (DIF), at least for systemically important and cross-border institutions, as well as a unified rule book for prudential supervision. There are, however, four major issues that must be confronted in order to move ahead with such a banking union.