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STABLE BANKING

The European Union is no more young; but it retains the ability to surprise and shock. In recent years it has lurched from one banking crisis to another. Admittedly, the crises have not been of its making. They have occurred on its southern rims, and have arisen out of national banking messes. Under its principle of subsidiarity, it was for the banking regulators of the member countries to deal with the crises in the first place. But their ability to do so has waned for three reasons. First, the public finances of those countries have deteriorated as growth has declined and ratios of public debt to gross domestic product have climbed; second, their banking systems have been important sources of funds for their governments; and finally, their national regulators have been under pressure to assist the governments, and have lost their teeth in the process.

These losses may be attributed to the working of democracy; but southern democracies have been more friendly to regulatory manipulation than is proper. The relevant democrats would point to the magnitude of the problems their countries faced lack of growth and massive unemployment, especially amongst the young. But no country can function without a healthy banking system; the task of keeping it in health has to be given to a politically neutral regulator that can take a long view. After much hesitation and conversation, the governments of the EU created a central bank. It used its pristine, spotless reputation to borrow and bail out southern banks and governments.

But bailing out the bankrupt is not necessarily the best way of restoring the health of a financial system; it can also be a way to an even bigger and less tractable bankruptcy. So the European Central Bank needed the power of surveillance and, when necessary, closure of hopeless banks. After much wrangling, it has got the power of supervision; but the political principals have denied it the power of closing down banks. For that they have resolved to create another bureaucratic fortress called the Resolution Board. A few jobs for the boys is a small price to pay for regulatory progress; but even that was not enough for the political bosses. They have insisted that the relevant member government must have the last word in deciding on the resolution of a bankrupt bank. To show that they were in earnest and not just engaged in creating jobs, they have laid down deadlines for each process involved in resolution. But this is unlikely to remove doubts about their seriousness. For while each involved authority will be required to make up its mind in a matter of weeks, it may decide in time to be contrary; there is no mechanism to deal with official obstruction. It does not even have to obstruct; there is no punishment for prevarication either. So the solution may not lead to many resolutions.