A new European banking space is born this year

José Manuel Barroso, President of the EC, Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro (left), and Michel Barnier, Member of the EC in charge of Internal Market and Services (right), gave a joint press conference on the blueprint for a deep and genuine Economic and Monetary Union (EMU). (EC Audiovisual Services).

The year 2013 can be termed as the European banking year, after the last EU Summit of heads of governments and states decided on 13 December to create a unified bank supervision and auditing space, under the European Central Bank in 24 out of the 27 countries, at the exemption of Britain, Sweden and the Czech Republic. This grandiose project to be completed on March 2014 is conceived to break the hidden connections between government borrowing and national commercial banks.

If the plan was already in place, the current Eurozone sovereign credit and banking crisis would have been avoided. At his point it has to be noted that the national banking systems in all and every Eurozone country supported their governments’ borrowing plans. In this way they lenders played a negative role in accommodating the creation of fiscal deficits, just by covering those gaps with their loans. Of course the major banking conglomerates in central countries like Germany and France didn’t lend money only to their governments, but extended this bad practice in helping more EU governments to over-borrow. The role of the German and French banks in the Greek tragedy is very characteristic.

It was not only the Greek banks but also Deutsche Bank, Credit Agricole and BNP Paris Bas which accommodated the over-borrowing of the Greek government during the past ten years. The exposure of those systemic European lenders to the Greek debt, sovereign and private, is at the heart of the on-going Eurozone crisis.

Until last summer almost all the major Eurozone banks avoided to lend to each other exactly because they didn’t know the degree of their exposures to the Greek, Italian and Spanish sovereign and private debt. One trillion in long term and almost zero cost loans were needed from the European Central Bank to 5,000 Eurozone commercial banks, to restore confidence in the monetary sector. Towards the same end, restoring confidence, the ECB guaranteed all the short term government bonds of up to three years maturities hoarded by commercial banks.

In any case the plan to place the EU commercial banks under the watchful eye of the ECB is a giant step towards cutting the bond between lenders and governments. Initially ECB will be carefully monitoring and auditing 200 major European banks out of the 5,000 Eurozone banking firms. This close supervision will make sure that no systemic bank will be allowed to over-expose itself to single clients or economic activities. At the same time in the unlike event that a bank will be needing salvation in the future, the ungraceful task will be undertaken by European Stability Mechanism in cooperation with the European Banking Authority under the auspices of ECB.

It is even more interesting that this new banking supervision space within the EU, will lead at some point in the future to a common scheme of bank deposits guarantee. Understandably this step has to be taken together with the mutualisation of the national debt between the Eurozone countries. That is equal to making all the 17 countries responsible for everybody’s debts (or Eurobonds). The reason is that a common bank deposits guarantee scheme will be tantamount to mutualising all kinds of debt, sovereign and private. The common denominator in this affair is the commercial banks, with their exposure to every kind of debt.

That is why the new supervision scheme is bestowed to the ECB and the EBA, which will have as their task to make sure that no bank is over-exposed to dangerous loans.