Future growth hooked to banking union

Tõnis Oja
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Stalling banking reform undermines competitiveness of eurozone banks and postpones acceleration of economic growth.

The low tempo or European banking reform retards active lending, posing a threat that European economy is in for long-term languishing.

In a recent press-release, finance minister Jürgen Ligi said Estonia desires common rules so that the banking fund would be launched as soon as possible, helping avoid possible future problems.

For speedy execution of the banking reform, there’s a vital reason: the longer it stalls, the lengthier the wait for European economy to recover.

«In eurozone it is important to restore growth of incomes. Eurozone is a closed economy, therefore a little growth-boost may be provided by export. However, without wage rise and decrease of unemployment, supporting private consumption, we are in for a continued period of low growth,» said the Nordea Bank chief economist Tõnu Palm a couple of weeks ago while presenting the bank’s economic forecast.

«If we get the banking reform over with, lending growth might start supporting eurozone economy,» he added.

Mr Palm explained that last year financial crisis was still in full swing. From a bank’s standpoint (meaning an average European bank) this means that as the bank is trying to tidy up its balance books, new regulations will come immediately.

Even with stress tests passed, the banks may be facing a situation: «We have fallen behind the US banks, we have fallen behind the UK banks.»

«Then comes the talk that we have indeed fulfilled all norms and the competitors are far ahead; and only then the loan taps are opened more. Today, there’s enough stress in banking – staff is being cut, activities are being cut, cuts are being made till this very day,» said he.

The same was said by the billionaire George Soros. According to him, Europe is faced with 25 years of Japanese-like stagnation if politicians will not speed up eurozone integration and will fail to change the policy which robs banks of desire to lend. Mr Soros pointed to falling behind (time-wise) from banks elsewhere in the world.

As European debt crisis reached its peak two years ago, the EU undertook to move towards a common banking union. The new union will be undergirded by a joint supervision system, joint crisis resolution system and a joint system for deposit backup.

The initial deadline set was very short. According to plans, the joint supervision should have been launched at the beginning of 2013.

Currently, stress tests are underway in the banks that will be included in the supervision, to be concluded by the fall; the joint supervision is supposed to start functioning in November.

At the moment, finance minister level negotiations are underway regarding the so-called second pillar of the banking union, the crisis resolution mechanism and the creation of the crisis resolution fund to go with it.

Into the fund, money will be collected from bank payments, and it will be used to cover possible crisis resolution costs.

Should the crisis resolution mechanism be agreed upon, its council would start functioning at the beginning of next year. The fund itself will only be created in 2016.

The third pillar of the banking reform – the joint deposit guarantee system – will only be tackled once the two first pillars are in place and functioning.

According to Swedbank chief economist Tõnu Mertsina, the banking reform in itself is not limiting lending. However, the introduction of joint European banking supervision will mean additional costs, which makes lending a bit more expensive. This is especially true regarding some client groups with higher risks.

«Availability of loans is substantially affected by interbank market interest (Euribor) which, at the moment, ought to be supportive of investments. When enterprises start to feel more confident regarding increase of demand, need to invest will go up, as also lending,» said Mr Mertsina. «At the same time, right now companies are financing quite a substantial part of investments out of own funds,» he added.

Erki Pugal, credit department head at SEB, said that regarding Scandinavian banks he sees no link here.

«Banking reform as such has no effect on our lending activity; rather, current loan volumes are meagre due to low demand,» said Mr Pugal.