1. Barriers to using full potential of the banking union
Peter Goliaš
INEKO Director, ineko.sk
14 March 2014
Prague

2. Key barriers Undercapitalized banks
Soft and complex/non-transparent regulation
Insufficient public backing – risk of protracted malaise
Zero risk weights for domestic sovereign debt
100% guarantee for bank depositors
Incomplete single banking market

3. Undercapitalized banks
2008 crises: Many big banks had real minimum capital ratio of 2% instead of 8%
Problem: Complex and flawed “risk-weighting” of banks’ assets
Simple but crude solution: At least 3% “leverage ratio” (equity to assets)
Source: The Economist, A worrying wobble, Leavened, January 2014

4. Soft regulation
In January 2014 the Basel committee “softened” the formula for calculating leverage ratio
The Economist: “If Europe’s banks met the leverage ratio, investors would trust them more. They could then finance themselves in capital markets and wean themselves off the support of the European Central Bank.”
Potential (alternative) solution: Transparent weighting of assets, transparent stress tests

5. Protracted malaise?
Without quick resolution we are risking protracted malaise dragging down economic growth
National governments might refuse to take over the bad debts of banks
Resolution scheme with sufficient common backing is necessary
To prevent the risk of moral hazard, any bank recapitalization from common funds should be conditional upon adopting structural reforms in the financial sector and the economy

6. Zero risk weights
Capital Requirements Directive allows for zero-risk weights for the sovereign debt of EU Member States denominated in the domestic currency
Arguments against:
Investment into government bonds squeezes out private investment (overly expensive loans for businesses)
Easier access to money reduces government’s motivation to implement structural reforms
Under-capitalised banks especially have an incentive to invest into domestic government bonds and the link between banks and governments becomes stronger

7. 100% guarantee?
Depositors holding less than €100,000 have 100% guarantee
Moral hazard problem – with 100% guarantee people care much less about the health of their bank
Solution: Reduction of 100% guarantee (at least to 99%, the world is not risk-free)
Cases of Devín banka, Cyprus

8. Single banking market
Administrative barriers to enter and operate on national markets should be diminished
Healthy foreign banks should have an equal opportunity to operate where local banks have failed
This would strengthen competition and, thus, increase quality of banking services as well as capital accessibilty

9. Thanks for your attention!
See also INEKO study Solutions to Public Debt Crises in the EU: Seek Returns on That Investment (Views from Slovakia).