Don’t put euro bank union cart before horse, says Bundesbank VP

A European banking union could bring advantages only if properly anchored in a fiscal union with powers to stop countries breaking budgetary rules, the Bundesbank said on Tuesday.

“In a banking union, a crisis in one country’s banking system may require the use of taxpayer money from other countries,» Bundesbank Vice President Sabine Lautenschlaeger said in the text of a speech at a banking supervision conference.

“Whoever is footing the bill must also have a right of control, particularly when it comes to the large sums that are seen in banking crises,» she said.

A number of European policy makers have suggested a banking and fiscal union to shift the burden of the financial crisis onto broader European shoulders, relieving individual countries like Greece or Spain.

It is not yet clear what politicians mean by «banking» or «fiscal» union, Lautenschlaeger said, but a banking union would bring advantages if it implied more integrated banking supervision or greater firepower to wind down national banks and prevent bank runs.

Lautenschlaeger warned against creating a banking union without a supporting fiscal union.

Banks in countries with high refinancing costs would benefit most from a banking union and might use the advantage to buy more government bonds from their home country, she said.

In effect, banks would pass on their more favorable refinancing conditions to their home countries and thus dampen the disciplining effect of the financial markets.

The pooling of responsibility through a banking union would spread through to sovereign bonds of problem states, she said.

“The result would be a pooling of the governments’ liabilities through the back door, without the possibility of control or the protection of a fiscal union,» Lautenschlaeger said. [Reuters]

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