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Europe's Bankers Aren't Ready for Marriage

Ferdinando Giugliano
·4-min read

(Bloomberg Opinion) -- After a year-long pause, the euro zone seems ready to resume talks over the completion of a “banking union”. The project — which includes creating a single deposit insurance scheme for all the bloc’s lenders — would go a long way toward boosting the resilience of Europe’s financial system.

For all the good intentions, however, the zeitgeist in the monetary union has changed. The pandemic has spurred a new wave of economic nationalism, and banks are part of it. Take the board coup at UniCredit SpA, Italy’s second largest lender. It shows how banks are increasingly looking inward rather than embracing the European project.

Paschal Donohoe, president of the Eurogroup of finance ministers, told the Financial Times this week that he intends to present a new detailed banking union plan for the middle of next year. The euro zone has created a single supervisor for its lenders, centered around the European Central Bank, and devised a single rulebook to deal with banking troubles. Last week finance ministers also backed plans to beef up the so-called “Single Resolution Fund” so that it can handle bank failures using money from the European Stability Mechanism, the euro area’s rescue fund.

But there are still several missing pieces. The liquidation of smaller banks continues to take place using national rules, which can vary widely between countries. Then there’s the issue of who provides liquidity to a significant lender as the authorities wind it down. Most important, the euro zone still lacks that joint deposit insurance scheme, which would guarantee savings up to a certain threshold in all banks. This tool would make sure all of the bloc’s depositors are equally protected, rather than having to rely on the strength of their national institutions.

Last year Olaf Scholz, Germany’s finance minister, suggested Berlin was ready to drop its longstanding opposition to a watered-down version of this plan. Germany fears it would be on the hook for banks in weaker member states. Discussions have since stalled. That the euro zone wants to take a fresh look at this debate is welcome and overdue.

Unfortunately, the banking system doesn’t seem ready for “more Europe.” The pandemic has spurred a wave of consolidation but, from Italy to Spain, this seems to be occurring mainly along national lines. Since the creation of the banking union six years ago, there hasn’t been a significant cross-border merger. That’s unlikely to change.

The recent ousting of Jean Pierre Mustier as chief executive officer of UniCredit confirmed that banking nationalism is on the rise in the euro zone. The Frenchman had pursued a turnaround strategy that won him few friends in Italy, as he aggressively cleaned up the bank’s books (even if this meant accepting lower prices for unwanted assets than other Italian bankers deemed acceptable).

Elisa Martinuzzi: Italian Banking Is Hard Work for a Frenchman

Italy’s politicians also feared that Mustier might seek a cross-border deal for UniCredit, for example with France’s Societe Generale SA. Such a merger would have been an important symbolic step toward the creation of a true pan-European banking system, but it would have meant a loss of Rome’s influence over the combined entity.

Another bad sign from Italy is its hunt for a buyer for Banca Monte dei Paschi di Siena SpA, a troubled lender that was nationalized in 2017 and which faces yet another capital shortfall. UniCredit is considered the most likely buyer, even though Rome will have to offer significant sweeteners to make it happen. Mustier would have been a tough negotiator, perhaps tougher than many in Italy would have liked. UniCredit shareholders now fear that the bank will be subject to excessive political influence in the Paschi talks, which helps explain why its shares dropped by more than 10% after the news of the CEO’s departure.

In fairness, some of Mustier’s ideas might have contributed to the fragmentation of Europe’s financial system, including his plan to ringfence the bank’s international activities in a separate holding company. But, on the whole, the sorry UniCredit saga reinforces the feeling that the euro zone isn’t ready for a banking union. Finance ministers are right to discuss the rules, but there are deeper political issues they must tackle first.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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