The United States is hardly the country to point fingers when it comes to banking missteps. After all, this country is still climbing out of the massive economic recession set off by Wall Street and the financial industry (including big banks) in 2008. Yet, if this country has learned nothing, it is that there needs to be enough cash in those institutions to secure their deposits so that the government doesn’t need to step in again to save the day…and the economy.
Europe has recently emerged out of its own financial crisis, first in Greece and then extending outward to countries as diverse as Ireland, Spain, and Italy. Only Germany seemed to be stalwart in keeping its financial house in order, but then it has a growing economy not willing to engage in the type of risky behavior seen in countries like Iceland…or the US for that matter.
Regulation and the challenges of a single currency
Like the United States, more regulation of the financial industry was seen to be part of the solution to avoiding the next banking meltdown. The European Union (EU) has come together and created a European banking union. However, like so many things about the EU and the Euro, it’s gotten political.
Everyone is aware that it’s challenging to operate as a single unit under a single currency. However, for Europe to have an effective economy, the Euro can’t be worth more in Germany than it is in Greece. Yet one wonders if that is inevitable, given the continuing unevenness in legislation applied to banking and the difficulty in getting sovereign nations to give up some of that control over national banks.
European banking union
While the European Parliament has ratified legislation to put in place measures to shore up European banks, this legislation has gotten watered down by the very countries whose economic assets it is seeking to protect. For example, the European banking union was supposed to guarantee deposits, so as to prevent bank runs. However, each nation has its own banking insurance, and so this measure has been left to individual countries instead of uniting under a single body (like the FDIC in this country).
Then there is the issue of the Single Resolution Fund, which was created to be able to step in with financial assistance if banks get in financial trouble. It has been decided that this fund will start with 55 billion Euros (US $76 billion), with the right to borrow more if necessary in an emergency. However grand a figure this appears to be, it’s a mere pittance in the face of just one large bank going under, with some of Europe’s largest banks have assets exceeding 1 trillion Euros.
Crisis not averted
To add to the misery, even if the European Central Bank (ECB) decides to bail out a major bank from the Single Resolution Fund, its European members can vote against the idea, leaving the bank helpless (barring what the country in which it operates is willing to do). In short, despite creating new protections for itself, the EU has left itself vulnerable to another economic crisis.