Deutsche Bank Research

Against the background of the difficulties in the Spanish banking sector, suggestions have again been made, inter alia by the IMF, the ECB’s Asmussen, and Irish PM Kenny, to use EFSF / ESM funds to directly support banks. Under current arrangements, such funds would need to be channelled through the respective sovereign in the context of a fully-fledged adjustment programme.

In principle, the idea of direct use is a very good one, exactly because it breaks the vicious cycle between ailing banks and sovereign debt problems. By bringing an EU-level fund into the equation, the interlinkage of national budgets and banking systems is weakened, making it easier to solve each problem individually. However, direct ESM assistance to banks would only be politically acceptable if EU member states were prepared to transfer authority for banking supervision, including resolution powers, to the EU level. Otherwise weak governments would seek to shift the bill for cleaning up their banking systems to other member states while retaining the control over their banking systems. As we have maintained for years: it is time for bold steps towards truly pan-European financial supervision and an EU-level restructuring fund, without which the institutional framework for the single financial market and EMU remains incomplete.

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Published with kind permission of Deutsche Bank Research.