Doha: The eurozone took another important step two weeks ago to create a banking union.
Eurozone leaders agreed to delegate the responsibility of supervising banks to the European Central Bank (ECB) starting next year and create a unified system for handling banking crises. This will ensure that the risk of another eurozone financial crisis is reduced and the link between the resolution of banking crises and sovereign debt is diminished. It also represents another important step to strengthen the credibility of the euro, Qatar National Bank’s weekly analysis said.
Following the global financial crisis, most of the eurozone banks found themselves highly exposed to the economic downturn and in need of public support to restore their financial viability. This was particularly true in countries where the banking sector had high exposure to the housing market as in Ireland and Spain.
Overall, European banks are estimated to have incurred losses approaching €1 trillion between the outbreak of the crisis in 2007 and 2010.
With the economic downturn and the housing market turning sour, many banks found themselves illiquid or outright insolvent. It was then up to the public sector to rescue them in what has come to be known as the “deadly embrace.”
The European Commission approved €4.5 trillion in state aid to banks between October 2008 and October 2011, a sum which includes the value of taxpayer-funded recapitalisations and public guarantees on banking debts. This put a heavy burden on already weak public finances and pushed up sovereign debt ratios. Ultimately, the impact of the banking and sovereign debt crisis was to drag down both the eurozone private sector through lower bank credit and the public sector through higher fiscal deficits and debt, leading to the longest eurozone recession in history.
In order to avoid another costly banking crisis, the eurozone decided to move ahead with a banking union. In June 2012, the European Commission agreed on a proposal for a harmonised bank recovery and resolution mechanism. The proposal was further strengthened two weeks ago under pressure from the European parliament to give more autonomy to the ECB in supervising and intervening in problem banks, together with sufficient resources to inject liquidity when needed, the QNB said in a statement.
Under the current agreement, the ECB will take over the regulation and supervision of eurozone banks starting in 2015. Non-eurozone countries, like the United Kingdom, are not part of the current agreement as they have no voting power on the ECB Board. However, they can potentially participate through a separate association agreement.
The agreement requires that all banks comply with the same regulatory standards and be subject to the same strict supervision.