EU prepares a banking union amidst financial ruins

Press conference by Michel Barnier, Member of the European Commission, on taking action on shadow banking to avoid new sources of risk in the financial sector, 19/03/2012. (EC Audiovisual Services).

There was no better opportunity than now, to observe how unfounded and shallow the institutional structure of Eurozone was, probably for the big guys to do whatever they liked. At a time when the Cyprus banking sector threatens to drive the whole island to a shipwreck, the European Parliament, the Council and the Commission are concluding a deal over future banking supervision and they congratulate themselves for their …prudency. Reading this agreement between the three most important EU bodies in verso, it becomes obvious that there was not any kind of central control over Eurozone banks and every one of the 17 countries could let its lenders have it their way.

In this environment Cyprus banks were left free to inflate themselves to the point where they ‘produced’ almost half the GDP of the Republic. The Cyprus authorities didn’t have any incentives to place the tiny country’s big banking industry under control and let them accumulate assets and liabilities by eight times the annual GDP of the island. Of course Cyprus is not the only Eurozone member to have let grow its banking sector without any prudential controls and rules.

Cyprus like the others

Ireland and Spain are the other two Eurozone countries to have tasted the bitter repercussions of an overgrown banking sector’s failure, following a long period during which the industry went rampant. In this respect Ireland, Spain and Cyprus are the three countries which had the misfortune to see the end of this path to catastrophe. There are others however that may follow suit. Unfortunately there is plenty of time for more banking tragedies to be staged before the banking supervision is meticulously performed by the European Central Bank or the European Banking Authority acquires any tooth.

As if nothing happens in Eurozone’s banking industry last Tuesday a deal on banking supervision legislation, “that will strengthen EU-level oversight of many EU banks” was struck by Parliament and Council negotiators.  As the EU legislative’s Press release puts it, “Parliament’s negotiators inserted many provisions strengthening the system’s transparency and accountability. They also ensured that its working structures will be imbued with a European spirit, rather than reflecting just a sum of national interests”.

In the meantime, entire countries are on the verge or are languishing to avoid total financial collapse, because their banking sector profited from the lack of any kind of supervision in Eurozone. Apart from the dividends in terms of employment and lucrative private incomes the banks offered in many countries, national governments had profited also from an open borrowing line in the local financial system. This was the case of Greece and Italy and who is to say where else.

Despite the banking ruins all over Eurozone’s periphery, European Commissioner Michel Barnier didn’t want to miss the opportunity to boost about the twenty years delayed banking union. He said:”With today’s agreement, a fundamental pillar of banking union has been put in place: I would like to thank the European Parliament whose constructive attitude has allowed an excellent final result to be reached in record time. I am confident that the European Parliament will soon confirm its agreement in a plenary vote”.

Only big guys allowed

If this is not a proof that main European bodies, like the European Parliament and the Commission appear some times as living in another planet, then reality has been exorcised from Brussels. Probably this was done on purpose, that is leaving the banking field without rules, so as the big guys can do whatever they wanted. Somebody forgot however that even the little guys can profit from the ‘anything goes’ environment. Now the big guys want to have the ECB protection only for them, that’s why they show the exit to Cyprus. It’s a clear message for the other small players to see what can arrive also to them, and get wise.