* Absence of backstop undermines plan to support lenders
* Fitch: bank risks must be pooled to break sovereign link
* Bank union debate bogged down over ECB powers
* Timeline for handing ECB new authority looks in doubt
By John O'Donnell
BRUSSELS, Sept 18 Concerns are growing among
European investors and lawmakers that plans for a eurozone
banking union will end up half-baked, with the financial
backstops required to underpin the ambitious scheme unlikely to
be in place for years.
Differences of opinion over what precisely is needed to
create a banking union among the eurozone's 17 countries and
other EU states that decide to join were on display at a finance
ministers' meeting in Cyprus last weekend.
As well as questions about how quickly the European Central
Bank can be put in charge of overseeing banks, the agreed first
step towards a banking union, there are divisions over how to
set up a single bank-resolution fund and whether it is feasible
to have a unified deposit-guarantee scheme any time soon.
The last objective, in particular, looks likely to prove a
major stumbling block, with Germany regarding a single guarantee
as akin to the mutualisation of eurozone debt -- something it
firmly opposes and has said cannot be discussed until the end of
the process of deeper EU integration.
"Originally the idea of a banking union was to have deposit
guarantees to stop the outflow of money from Spain," said Sharon
Bowles, who chairs the European Parliament's influential
economic and monetary affairs committee.
"But they are shying away from mutualisation and all you are
left with is supervision, which if left on its own would have
more drawbacks than benefits. It could split the (EU) single
There are three major steps in a banking union: the ECB
being given responsibility for monitoring all eurozone banks and
others that sign up; a fund to close down and settle the debts
of distressed banks; and a fully fledged scheme to protect
While ECB supervision is expected to be in place from early
next year and the framework for a resolution fund is under
discussion, Germany and others are concerned deposit guarantees
will put them on the hook for banks in Greece or Spain.
"People have been living under the illusion that banking
union is a substitute for fiscal union," said Paul De Grauwe, an
economist at the London School of Economics whose analysis has
frequently informed policymaking in Brussels.
"It's about money and having access to taxpayers' resources.
There is a risk it will be half-baked if it does not have a
And even when it comes to the first step in the process -
ECB supervision, which policymakers regard as a pre-requisite
for the direct recapitalisation of struggling banks - there are
differences over what steps need to be in place first.
In Cyprus, German Finance Minister Wolfgang Schaeuble warned
that handing oversight to the ECB was not in itself sufficient
to allow for direct recapitalisation, casting doubt on how
straightforward the process will be.
The remarks disappointed investors, who were expecting the
oversight issue to be settled by the end of this year so that
the ECB could start to take responsibility from Jan. 1, 2013.
That in turn has heightened the edginess surrounding Spain,
many of whose banks are in need of recapitalisation and are
expected to get funds from the eurozone's permanent bailout
fund, the ESM, in the coming weeks or months.
Germany's reticence is understandable. Banks in the
eurozone's weakest countries have made trillions of euros of
loans to consumers, business, governments, banks and other
institutions that may not be able to repay.
Banks in Spain have lent 2.2 trillion euros ($2.86
trillion), including money lodged with other banks and the
eurosystem, according to ECB statistics. Banks in Italy have
loans of 2.5 trillion euros. In Greece, the stockpile is 270
billion euros, and more than 430 billion euros in Ireland.
"People are worried from a systemic point of view about
Spain and Italy being dragged further into the crisis," said
Tony Stringer, a sovereign debt analyst with Fitch Ratings.
"From the point of breaking the link with sovereign
creditworthiness, there has to be a way of dealing directly with
the banks' liabilities, rather than simply having a pan-European
regulator. By pooling the banking sector risks through the ESM,
you are getting away from the pernicious link."
Eric Stein, a fund manager with Eaton Vance Investment
Managers, a U.S. investor that buys European government debt, is
watching the debate closely.
"As the sugar high wears off after the action of the ECB and
the Federal Reserve, markets are going to focus on problems such
as those in the Spanish banking sector. Up to now, there was a
consensus the ESM was going to take care of that."
The debate about the different aspects of banking union,
which is as complex as it is divisive, has already become bogged
down in discussion about how wide the ECB's new remit should be.
The European Commission has proposed that it be responsible
for the oversight of all 6,000 banks in the eurozone in order to
give it the legal clout to overrule a national regulator and
deal with a smaller bank in crisis. In practice, day-to-day
supervision would stay with the national regulator.
Yet Germany, which wants to keep oversight of its regional
savings and cooperative banks and has long had doubts about the
wisdom of direct bank recapitalisation, has questioned whether
the ECB should spread itself so thinly. It wants the ECB to take
charge of major systemic banks, not all 6,000.
"You don't know where the problems will manifest
themselves," said Fitch's Stringer, questioning Germany's line.
"If there is a systemic problem across a number of smaller
entities, that can add up to a big liability.
"Any supervisory system that didn't embrace the whole
banking sector would be less supportive to sovereign ratings."
The debate worries policymakers.
"If the idea is to do some sort of lax supervision in a way
to meet the conditions for the ESM to directly recapitalise
banks, I would not do this," said one central banker.
The depth of division, as well as the prospect of a
drawn-out battle with the European Parliament for approval of
the changes to how banks are monitored, means reaching the
deadline set by euro zone leaders of starting the new regime
from the start of next year is all but impossible.
"It's going to take time to assess where all the member
states stand on all of this," said one EU diplomat. "In terms of
getting decisions in place by January next year, that's going to