Don Quijones: Why Are TBTF Banks So Happy With The European Banking Union?

By Don Quijones, a freelance writer and translator based in Barcelona, Spain, and editor at Wolf Street, where this article was originally published

On Tuesday, November 4th of this year, supervision of the Eurozone’s 130 biggest banks, representing 80% of total financial assets, will be passed from national authorities into the welcoming hands of the ECB. From that day on, European banking union will be a reality.

The banks love the idea, as do apparently most Eurocrats, Members of the European Parliament, and national leaders. Even Angela Merkel and her government have finally come on board, in exchange for guarantees of “quality surveillance, tighter coordination of economic policies, and more binding agreements.”

As for the rest of the inhabitants of the Eurozone – all of whom will be impacted in one way or another – most are blissfully unaware that it is even happening. A new continent-wide banking system is taking shape right before our eyes and under our noses, but our eyes are closed and our noses are blocked.

According to the official story, the citizens of Europe stand to benefit enormously from the banking union since it will impose greater control and tighter regulation of Europe’s banks. It will also save taxpayers from having to fund future bailouts. The only problem is: if the main point of banking union is to protect taxpayers and bank customers, why do the continent’s biggest banks seem so happy?

If the last six years have taught us anything, it is that when the big banks win, the rest of us lose. And if the banks lose (which, let’s face it, rarely, if ever, happens these days) the one thing you can guarantee is that they and their powerful lobbying representatives will kick up the mother of all stinks. None of which is happening. Indeed, quite the contrary: rather than seeing the new system as a threat, the banks see it as an immense opportunity.

The Two “Cs”: Consolidation and Concentration

The European banking union will almost certainly intensify the concentration and consolidation of the banking sector. This, despite the fact that the European banking sector’s most serious problem is the level of concentration – the mega banks that seem to be able to keep growing – and the fact that their sheer size and systemic importance make them impossible to resolve.

Thanks to a rather innocuous-sounding proposal called the “sales of business tool,” big banks will soon be able to grow even bigger, by gobbling up smaller, weaker ones.

To wit, from Corporate Europe Observatory:

Resolution authorities will explore if another big bank would be prepared to take over an ailing bank. The result will be even more concentration, and even bigger banks. This feature of the proposal is seen as a major opportunity by megabanks in Europe such as BNP Paribas.

When interviewed about the banking union, the CEO of BNP Paribas, Jean-Laurent Bonnafé, said: “Then the strongest part of the banking system could be part of some form of consolidation – either through an acquisition or through organic development plans.”

The process would be led by the strongest banks in the most powerful economies, he said – and there would be an opportunity for BNP Paribas to benefit. “In the end, consolidation will just take out the weaker players who were unable to strengthen their positions either because of their own situation or because of their jurisdiction,” he added.

No Glass-Steagall II

The European banking union will not only exacerbate the too-big-to-fail syndrome and with it the scale of moral hazard on the continent, it will also do precious little to address the too-complex and too-interconnected-to-fail aspects of the banking system – two of the main causes of the ongoing global financial crisis.

In late 2008, when U.S. authorities began their autopsy on the Lehman Brothers’ rotten corpse, they discovered that the bank was comprised of no less than 3,000 entities. Today’s European megabanks are no different: Deutsche Bank, according to “anecdotal evidence” cited by FinanceWatch, is made up of about 2,000 entities.

As FinanceWatch has warned, “if the banks are not reformed such that they pose less of a systemic risk, they will simply block the mechanisms designed to resolve them.”

This is exactly what appears to be happening. A perfect case in point is the Liikanen Report of 2012, which called for an end to the European tradition of universal banking and the adoption of an EU-wide Glass Steagall II. Even former Citigroup Chairman and CEO Sandy Weill, widely considered to be one of the driving forces behind the financial deregulation and “mega-mergers” of the 1990s, called for “splitting up” the commercial banks from the investment banks. “Bring back the Glass-Steagall Act of 1933 which led to half a century free of financial crises,” he said.

Yet in Brussels no one seems to have listened. According to some experts, the proposal EU Single Market Commissioner Michel Barnier is preparing bears little resemblance to the Liikanen Group’s proposal. It’s also likely that the proposed firewalls will be riddled with loopholes.

There are many other deeply troubling features of the proposed model for the European banking union. They include watered-down capital and operational requirements; the ECB’s potential conflict of interests in its new role as sole supervisor of the banking system (like the Fed, but with even more “independence” and power); and the continued emphasis on austere economic policies for the little people of Eurozone member states.

Of even greater concern is the chronic lack of funds to stabilize the system in the event of a repeat Lehman-type event.

Saving the System with Chump Change

The banking union has been sold to the public as a way of making the financial sector in general pay costs related to resolution. However, the “Single Resolution Fund” (SRF), which is supposed to be financed entirely by the banking sector itself (through a 1% tax on secured deposits in the Eurozone), will have at its disposal total funds of €55 billion.

Once upon a time €55 billion may have sounded like – indeed one day was – a lot of money. But in the world of modern-day banking, it’s chump change. In fact, it would barely fill even a small crack in the €2-trillion balance sheet of France’s biggest “too-big-to-fail” bank, BNP Paribas.

Just over a year ago FT columnist Walter Machau did some “back-of-the-envelope” calculations. He estimated that bad bank assets roughly constitute about 5% of Eurozone banking assets. If you throw in another 5% from hidden losses, the losses still being generated by the double-dip recession, and future losses through the bail-in of investors, you arrive at around €2.6 trillion. So in effect, in Europe’s new post-banking union reality, the SRF is somehow expected fill a one- or two-trillion-euro hole with just €55 billion of funds. Funds that apparently won’t even be fully available until 2023.

Granted, in the event of a bank collapse, the ECB will also have the bail-in option to raise further capital. The bail-in clause is meant to ensure that bank shareholders and bondholders (and quite possibly depositors, too) pay a fair share of the costs of restitution. However, the maximum these investors would end up having to pay is 8% of the banks’ liabilities, which is also unlikely to be enough to fill all the gaps.

As Bela Galgoczi, a Senior Researcher at the European Trade Union Institute (ETUI) in Brussels warns, this will leave only one option left for Brussels and Frankfurt – an option that just happens to be the exact same goal the senior architects of the European Project have been seeking all along. That’s right, fiscal union:

Apart from a few enthusiasts, nobody would sign up for a “federal Europe” now, but step by step as an unintended consequence of a series of necessary decisions, we might end up there. The front door towards a “genuine monetary union” had not been accessible at the time of signing the Maastricht Treaty, debt mutualization was also not viable and as the latest example shows the monetization of Irish debt either.

As always, expediency remains the name of the Eurocrats’ game. Their means are also the same: Obfuscation, opacity and lies. Especially when things “get serious”. And right now, things could not be more serious. If banking union does get consummated – and by this point the only thing stopping it would be a financial bloodbath or political meltdown (hardly out of the question) – pretty much everything that is wrong with Europe’s current financial system is almost certain to get worse.

Not only that, but fiscal union would soon follow on its heels. And once Brussels has its own tax-raising powers, only one small step will remain in the old continent’s mad stumble towards full-blown federalism: the holy grail of political union.

Negotiations behind closed doors are under way to water down all forms of financial regulation on both sides of the Atlantic via the Transatlantic Trade and Investment Treaty. Leading the charge: not the US government, but an unholy alliance between the European Commission, Wall Street, and the City of London. Read…. A Dark Alliance: European Union Joins Forces With Wall Street

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  1. psychohistorian

    A quote from the “A Dark Alliance…” link at the end:

    “One of the Commission’s proposals is that regulations for “certain transactions” should not cover foreign investors, in particular with regard to “sophisticated investors”. This would effectively mean that regulation on transparency of hedge funds would not apply to U.S. firms, while U.S. rules on derivatives reporting would not apply to European financial firms. It’s worth noting that the unwinding of the derivatives market – now estimated to be worth over 1 quadrillion dollars (more than 14 times the entire world’s annual GDP) – was the trigger of the last global financial crisis, from which we’re still far from recovering.”

    I riffed on an old poem a while back that seems appropriate to repeat:

    Ring around the debts
    A pocket full of bets
    Derivatives, derivatives
    We all fall down

  2. John

    The problem I see is no one has a clue as to what the health of the banks are. It seems to me this centralizing at the ECB is to provide cover for bad balance sheet banks. Yea, do a banking union without knowing the true nature of the balance sheets is criminal negligence.

    Moral hazard will only get worse. Banks can now act even more reckless, with near impunity. Of course they are not interested in Glass Stegall because EC, ECB and EP were too happy to see Cypriot depositors pay for bank bailouts with accounts above 100k. Unbeknownst to us this was the blue print for paying for bailouts. Bank depositors pay for criminal bank activity.

  3. susan the other

    I guess this banking union, with its German regulations, being the first step in a process of federation and fiscal union, means the City of London will have to comply. But it and Wallstreet and all the big banks are all trying to play the TTIP off against banking and fiscal union to avoid regulation. It looks irreconcilable because federation requires more regulation, not less. Not to mention that, as Yves says, the big banks are all wards of the state.

  4. Chauncey Gardiner

    The global policy effort to displace sovereign national governments at the locus of political control appears to be well underway through mechanisms such as that Don Quijones has described here, the TTIP and TIP, etc. I am reminded of a statement that has been attributed to Henry Kissinger, but I believe is unsourced: “Who controls the food supply controls the people; who controls energy can control whole continents; who controls money can control the world.”

    In my opinion those who are seeking such control are going to be unpleasantly disappointed, regardless of their success or failure in achieving their policy goals. For that too is embedded in the nature of their narcissistic personality disorder and psychopathy.

  5. human

    “Give me control of a nation’s money and I care not who makes the laws.” ~ Mayer Amschel Rothschild.

    “because federation requires more regulation,…” One of the very reasons for the trade pacts. Plausible deniability, deceit and falling back on a hands-tied position due to The Law.

  6. Demeter

    In the short term, the TBTF may feel omnipotent and invincible and grow ever larger. But in the long run, I foresee the complete “nationalization” of all banking in the Eurozone, as runs and failures befall the greedy and unscrupulous. THEN the ECB will actually act like a nation of states, or provinces, or whatever they choose to call themselves, with a strong federal government pulling all the strings, and the banksters either shut out, or forced into government. But will it be a government of banksters, or of people? That, I cannot foresee.

    Based on the ease with which Goldman Sachs alumni (the technocrats and elitists) are stuffed into political power already, it may be a very unhappy ending for People. Until the promise of 1848 is finally fulfilled.

    (All of Europe was in revolution in the years surrounding 1848: the lands that would be known as France, Italy, Germany, all of Central Europe, and the Hapsburg, Holy Roman and Ottoman Empires collapsed:

    This ongoing rolliing revolution continues to this day….the banksters are fools if they think to co-opt it with their international fascism.

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