The euro zone has learned the lessons of the previous financial crisis and is facing the current banking turmoil in a significantly better situation than the rest of the world, European leaders defended yesterday at the end of the euro summit held in Brussels this morning. Some statements that contrast with the red numbers in which several European entities were listed yesterday, dragged down by the collapse of the shares of the German banks Deutsche Bank and Commerzbank.
The German Chancellor, Olaf Scholz, assured that “there is nothing to worry about” regarding Deutsche Bank and defended both the profitability of the entity and the stability of the European banking sector. But these turbulences, which occur two weeks after the bankruptcy of Silicon Valley Bank in the United States and the bailout of Credit Suisse in Switzerland, show that despite the reassuring messages about the strength of European banks, the crisis of confidence may affect EU entities.
The strict supervision put in place as a result of the debt crisis a decade ago, however, places European banks in a position of strength far superior to that of other banking systems, explained the president of the European Central Bank, Christine Lagarde, to European leaders, marking distances in particular with the United States. The eurozone banking sector, she stressed, has “solid positions in terms of liquidity and capital” and is therefore “resilient”.
While on the other side of the Atlantic the capital requirements derived from the Basel III regulation only apply to 13 banks, the largest in the country, but not to the medium-sized ones (comparatively large for Europe), in the Eurozone these thresholds apply to some 2,000 entities, hence the European banking sector has a bigger cushion to absorb blows.
After listening to Lagarde, the Dutch Prime Minister, Mark Rutte, judged the repetition of a financial crisis in Europe like the one of a decade ago “very unlikely” thanks to “how we have organized ourselves in Europe.” And, taking the ECB president’s arguments to an extreme, French President Emmanuel Macron stated that “it is in the euro zone where the most solid banks are found.”
The improvement of supervision does not imply, however, that the euro area faces the new challenges with all its homework done and Lagarde encouraged them to complete the institutional scaffolding of the euro area, since not all the instruments that were put on the table are in force or They were approved. Thus, the declaration agreed yesterday by the leaders of the 14 countries of the monetary union celebrates that the banking union has strengthened the resilience of European entities but calls for “maintaining efforts to complete it in line with the Eurogroup declaration of June 16, 2022”.
The mention of that text through a convoluted formulation in which the European governments encourage themselves to continue doing something that still has to be done, refers to the latest attempt to advance in the creation of a European deposit fund, but limited to strengthen national systems. Although in all euro zone countries national legislation guarantees up to 100,000 euros per deposit, there is no mechanism to cooperate at the European level in the event that needs overwhelm the affected country.
The creation of a European fund – or, as an intermediate step, the gradual and piecemeal connection of the national systems – is the main pending task for the EU after the previous financial crisis. The project was launched in 2012, but has never been approved due to German opposition to the project, as it would potentially mean that in the event of a banking crisis, German taxpayers would have to pay part of the cost of guaranteeing deposits in other countries. .
The Spanish president, Pedro Sánchez, welcomed the mention of deposit insurance, but recalled that this approach is not enough for Spain and defended the need to have a genuine European guarantee fund because “it would improve market confidence and avoid risks of fragmentation”. The European bank subscribes to the concern. “As long as this is not done, your banks will be valued more for their nationality than for their solvency,” say sources in the sector.
