Saturday, July 7, 2012

7/7/2012: Banking union - a bit of a folly

Daniel Gros makes a cogent argument on banking union at :

However... his argument is partially self-defeating.

Unified banking operations for an Italian bank with german subsidiary he uses as an example, by allowing transfer of liquidity (funds / deposits) from German subsidiary to cover Italian parent's liquidity demand that arises from Italian bank's overall elevated riskiness would be, in effect, a case of mis-pricing risk for German customers of the Italian bank. Should these customers re-price risk post-banking union, the customers will walk out of the subsidiary and the Italian parent bank will still be short of liquidity.

Thus, unless Italian bank is made a German bank (or until), the problem will remain. The only way for the supervisory authority to avoid the problem arising in the short run is by deceiving German customers of the Italian bank.

In addition, in order to make an Italian bank into a German bank, common supervision will require full convergence of all banking models to a common denominator. Whether such a convergence yields a better Italian bank (by the standards of the day) and / or a less safe German bank is a matter of more than supervision, but of a full regulatory convergence.
Post a Comment