Euro zone takes a final step toward a banking union

Updated 29 March 2014

Euro zone takes a final step toward a banking union

The euro zone took another important step two weeks ago to create a banking union. Euro zone leaders agreed to delegate the responsibility of supervising banks to the European Central Bank (ECB) starting next year and create a unified system for handling banking crises. Going forward, this will ensure that the risk of another euro zone financial crisis is reduced and the link between the resolution of banking crises and sovereign debt is diminished. It also represents another important step to strengthen the credibility of the euro.
Following the global financial crisis, most of the euro zone banks found themselves highly exposed to the economic downturn and in need of public support to restore their financial viability. This was particularly true in countries where the banking sector had high exposure to the housing market as in Ireland and Spain. Overall, European banks are estimated to have incurred losses approaching EUR1tn between the outbreak of the crisis in 2007 and 2010.
With the economic downturn and the housing market turning sour, many banks found themselves illiquid or outright insolvent. It was then up to the public sector to rescue them in what has come to be known as the “deadly embrace.” The European Commission approved 4.5 trillion euros in state aid to banks between October 2008 and October 2011, a sum which includes the value of taxpayer-funded recapitalizations and public guarantees on banking debts. This put a heavy burden on already weak public finances and pushed up sovereign debt ratios. Ultimately, the impact of the banking and sovereign debt crisis was to drag down both the euro zone private sector through lower bank credit and the public sector through higher fiscal deficits and debt, leading to the longest euro zone recession in history.
In order to avoid another costly banking crisis, the euro zone decided to move ahead with a banking union. In June 2012, the European Commission agreed on a proposal for a harmonized bank recovery and resolution mechanism. The proposal was further strengthened two weeks ago under pressure from the European parliament to give more autonomy to the ECB in supervising and intervening in problem banks, together with sufficient resources to inject liquidity when needed.
Under the current agreement, the ECB will take over the regulation and supervision of euro zone banks starting in 2015. Non-euro zone countries, like the United Kingdom, are not part of the current agreement as they have no voting power on the ECB Board. However, they can potentially participate through a separate association agreement.
The euro zone agreement requires that all banks comply with the same regulatory standards and be subject to the same strict supervision. This shift in responsibility for bank oversight to the ECB will inject an element of impartiality in an area that too often in the past was left to national regulators (with strong interference from their own governments) to adhere to.
The agreement also provides for strong powers for the ECB to intervene in problem banks. The ECB can impose on banks to raise their capital, if it deems that banks are not sufficiently capitalized to withstand an economic downturn according to certain stress test scenarios. In addition, the ECB president is also given large leeway to determine whether a bank is insolvent and force it into liquidation, something the European Parliament insisted upon.


Oil up on slowing pace of coronavirus, Venezuela sanctions

Updated 20 February 2020

Oil up on slowing pace of coronavirus, Venezuela sanctions

  • Financial analysts say epidemic is likely to deal a ‘short-term blow’ to global economy

LONDON: Benchmark Brent oil prices rose for a seventh consecutive day after demand worries eased with a slowing of new coronavirus cases in China and supply was curtailed by a US move to cut more Venezuelan crude from the market.

Brent was up 71 cents at $58.46 a barrel at 1510 GMT. The global benchmark has risen nearly 10 percent since falling last week to its lowest this year. US oil was up 53 cents at $52.58 a barrel.

“Those in doubt of the economic impact from the virus should take heed from Apple’s surprise sales warning ... Put simply, this is the surest sign yet of the coronavirus fallout on the global economy,” said PVM analysts in a note.

S&P Global Ratings said it expected coronavirus would deliver a “short-term blow” to economic growth in China in the first quarter, echoing findings by the International Energy Agency.

Official data showed new cases in China fell for a second straight day, although the World Health Organization said there was not enough data to know if the epidemic was being contained.

The oil market price structure is also showing signs that prompt demand for oil is picking up, as the front-month Brent futures market is moving deeper into backwardation, when near-term prices are higher than later-dated prices.

This week, oil prices were also buoyed by a US decision to blacklist a trading subsidiary of Russia’s Rosneft, which President Donald Trump’s administration said provided a financial lifeline to Venezuela’s government.

Hopes that the Organization of the Petroleum Exporting Countries (OPEC) and allied producers would deepen supply cuts also supported prices.

The grouping, known as OPEC+, has been withholding supply to support prices and meets next month to decide a response to the downturn in demand resulting from the coronavirus epidemic.

But in the US, which is not party to any supply cut agreements, oil production has been rising. US shale production is expected to rise to a record 9.2 million barrels a day next month, the Energy Information Administration said.