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Preventing Future Shocks Means Adapting Banks Now

Finance ministers from Germany and France said Europe is ready to deal with any new banking crisis after an agreement to install a permanent lifeline to the euro area’s crisis fund.

The sovereign debt crisis ended years ago, but the scars remain. Dissatisfaction with the way countries handled the crisis was expressed at the ballot box, and this in part explains the rise of populist and eurosceptic parties across Europe. However, in an effort to shore up Europe’s financial infrastructure in the face of future shocks – and avoid painful corrections – Germany and France have been pursuing a lifeline in the form of a crisis fund.

Finance ministers from the two countries agreed to install a “backstop” to the Single Resolution Fund, which is the pot of cash that the euro area’s bank failure agency can use to prop up banks in the case of crisis. Confirmed as part of broader eurozone reforms during a conference in Luxembourg, the fund will eventually double in size to approximately 120 billion euros by 2024.

The measure is part of a larger framework designed to put an end to future taxpayer-funded bank bailouts, which occurred as a consequence of the financial crisis in 2008. Instead, the resolution fund is filled with bank contributions. Funds from the public sector would have to be repaid by the industry, and investors would take a financial hit before aid from the fund can be accessed.

“This will reassure markets, this will reassure the public that Europe is equipped to deal with any banking crisis”, said French Finance Minister Bruno Le Maire. “Savers should know they are protected because we now have the resources to deal with all bank crises including systemic banks.”

German Finance Minister Olaf Scholz noted that the fund’s increased capacity means that it  “is of the right size”. That makes it unlikely that the new backstop will ever be needed, as even the largest banks can handle trouble with the already existing funds. In fact, to bring a real-world example, the Single Resolution Board has only put one bank – Spain’s Banco Popular Español – through the resolution process. The crisis fund was not tapped and, instead, Banco Santander, Spain’s largest bank, took over the lender.

This plan is one of several measures the EU will be rolling out to manage risk, reduce market volatility, and boost growth.

The eurozone is considering an instant-payment system used by all banks in the bloc by the end of 2020. Copyright: PopTika /

The creation of a common deposit scheme would limit the incentive for depositors to take their money out of a troubled banking system, in turn shoring up banks when the economy gets rocky. The creation of pan-European safe assets – the equivalent of American government bonds – would result in one central issuer who would provide uniform eurozone bonds. This move would increase the supply of risk-free assets and help banks function more effectively. Other ideas on the table include creating a eurozone budget, along with a so-called “rainy day fund”.

Banks Mergers, Anti-Trust, and Insolvency

“I consider that today European banks are still too fragmented and we need banking consolidation”, said Bruno Le Maire, who joined President Emmanuel Macron’s centrist government in 2017, though he himself came from France’s conservative Republicans party. The largest potential consolidation concerned a potential union between the German Deutsche Bank and Commerzbank, which ultimately failed. However, cross-border bank mergers are even less likely to occur, despite the fact that the European Central Bank has repeatedly urged for precisely such consolidation to ensure that credit flows to where it is most needed.

Bank mergers are only one of the larger set of tools the EU is unveiling to protect the eurozone from future economic crises. Also necessary is a single regulatory supervisor as well as more integrated capital markets.  A shared budget aimed at encouraging convergence among the eurozone’s economies would also be helpful. However, while France and Germany have come out in favour of such a measure, the Netherlands have resisted the idea, fearing it would lead to transfers of wealth from richer to poorer states.

“The eurozone will not survive growing economic divergences between member states. We have to equip ourselves with the instruments to reduce the divergences”, said Le Maire, emphasising that the eurozone also needs to finalise plans to create backstops for banks saddled with bad and non-performing loans, as well as plans to better integrate capital markets. The latter can be achieved, he said, by tweaking insolvency laws in different countries to agree with each other. However, such tweaks are a sensitive issue for some states.

Le Maire also called for revising long-standing anti-trust laws, especially after the European Commission blocked the planned merger of the rail businesses of Siemens and Alstom earlier this year, seeing such tie-ups as necessary to build European champions.

“If eurozone member states are not capable of taking certain steps forward in the coming months, we risk weakening the euro and seeing new fractures emerge in the eurozone”, warned Le Maire. IMF chief Christine Lagarde has similarly warned that despite the widespread recovery, Europe’s financial sector remains dangerously exposed to future shocks if reforms designed to contain future risk are not quickly completed.

Digital Evolution

On top of those concerns, banks also have to contend with real-time money transfers – a service offered by cryptocurrencies, but less often by traditional banks. The eurozone is considering an instant-payment system used by all banks in the bloc by the end of 2020 in order to compete with not just traditional cryptocurrencies, but tech giants like Facebook also trying to cash in, which recently revealed plans for its own cryptocurrency, Libra.

Libra differs from speculative and volatile digital currency like Bitcoin or Ethereum because its value will be pegged to a group of – as yet unspecified – real-world currencies, and it would be backed by (as yet unspecified) assets.

Real-time payments have been possible since 2017, but only half of the eurozone’s banks are in on the scheme that allows for the service – which is also mostly used for domestic payments.

“The clock is ticking”, said Etienne Goosse, director general of the European Payments Council (EPC), that brings together large European banks, including Spain’s Santander, Deutsche Bank and France’s Societe Generale. Banks, which are fragmented to serve specific regions, are under serious pressure to adapt to already global, multinational tech giants with easy to use apps.

“They come with a global solution, under a global brand offering many things that the consumers seem to find wonderful,”, Goosse said when asked about the impact of Facebook’s plans for Libra. “So we have no time.”

Agustín Carstens, who heads the BIS, or Bank for International Settlements, known as the central bankers’ bank, told the Financial Times that the organisation supported the efforts of the world’s central banks in creating digital versions of state currencies. “Many central banks are working on it; we are working on it, supporting them”, Carstens said. “And it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.”

“The issue is how will the currency be used? Will there be discovery of information, or data that can be used in credit provision and how will data privacy be protected?” Carstens commented. “A very simple way to regulate this is to start with anti-money laundering rules. That is a very immediate and very obvious concern”, Carstens added.

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B. Lana Guggenheim

Lana is a freelance journalist based in New York City. She has a M.Sc. in International Conflict from the London School of Economics and Political Science. She has worked as an analyst, reporter, and editor, covering extremism, culture, economics, and democracy.

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