Research (Conseq)
Markets  |  November 07, 2012 14:43:23

Union Bank: Really helps prudent risk management in banks?

Creating a Union Bank in effect moving the critical regulatory powers and activities of the national banking regulators to the European Central Bank. National regulators would then prepare the implementation of the decisions of the ECB. Under the current proposal, the entry into the banking union should be mandatory for all members of the euro area, non-euro area EU bank to be able to join voluntarily.

The most important part of the preparation of the proposal is the creation of a rescue fund for banks. It would contribute to all eurozone banks and, if necessary, it drew in case of problems. The volume of funds in this fund is to be 500 billion euros, the bailout fund would be sufficient for a full recapitalization of more than nine banks Société Générale size (equity 52,883 miles . Euros). By such measures de facto authors expect that we will support in the market environment dysfunctional bodies, and thus subsidize inefficient banking sector. Artificially limit ourselves by self-cleaning function of the market.This trend is creating emergency funds is somewhat inconsistent with the emphasis on quality risk management that the banking sector in recent years is used as a charm. If owners know that in the event of improper management of the bank is still below a safety net in the form of bailout fund, its business may be accompanied by fewer precautions than necessary. Conservatively managed banks will be at a disadvantage compared to banks with riskier profile.

Strengthening the powers of the ECB also lies in the determination of capital adequacy and supervision or the granting of banking licenses. The ECB should also adjust the amount of seasonal capital buffers. There may occur within the euro area to complications.Doubt is that the business cycles in the euro area completely synchronized and have the same need for the capital adequacy of banks. The third essential measure of union bank deposit insurance is common. If by chance such as Banca Ladrón collapsed in Spain, they would have to refund deposits to participate as shareholders and savers Himmelherrgotbank in Germany. Critics point to the deposit insurance moral hazard. This means that people should not take into account the stability of the bank saving deposits and sunk into the unstable banks larger funds.

Common banking regulation, European banks through EBA since 2011. Now, an effort to centralize bank regulation has grown, especially after a huge expenditure of money from the core eurozone governments to save a Greek, and thus save their own banks. Greece's creditors pumping money then give European authorities have indicated that, in the case of losses from unwise investments will again bail out debtors, which supports such risk management, which will be formally Although fine, but it will be completely cut off from reality. Although Greece had before the crash (let's call a spade a spade) a very strong rating, but showed a continuous current account deficits and insufficient tax collection to manage such a large state sector.

For now, union bank approval postponed. Missing the broader consensus within the European Union. Germany would prefer stronger oversight only over large banks whose eventual downfall would bring similar chaos in the financial markets as the fall of Lehman Brothers. Together with Austria have traditionally had many small financial institutions. It is not entirely clear how the ECB can do to supervise more than 6,000 financial institutions eurozone. Sweden and Great Britain then they do not want their central banks, enforcing its own monetary policy, had to jump on the ECB's whistles. On the contrary, a strong supporter of what nejprovázanější bank regulation and deposit insurance is Spain, where the banking industry is currently struggling with high levels of problem loans. Timing so slightly smacks of expediency than genuine efforts to stabilize the European banking.

Let's look at the arguments for and against the ratification of this interesting piece of legislation. The most common argument that I have read in internet discussions is the possibility of "vacuuming" of the bank by her mother., Czech banks send their foreign mothers annual dividend in the amount of tens of billions of crowns. For the year 2008 CSOB sent his Belgian mother, struggling with a lack of capital, 17000000000 crowns, which is still a record dividend., Czech banks are stable and very good earning. believe that foreign mothers would act irrationally if it were trying to suck its Czech subsidiary. would cut the hen is laying the golden eggs. Indeed, two thirds Erste profit group created Czech Savings Bank. CSOB then make up almost half profit KBC.

Countries with sound banking sector approach to carefully design, access to bank Union, they could have a more negative impact. As a result, it may be obliged to enter the banking Union eurozone members from the brakes once deeper European integration.

The strongest argument creators Union bank is to stabilize the banking sector through better supervision. Standardization of risk management has been implemented guidelines of the Basel Committee. The question is this: can the ECB to oversee the bank's Frankfurt better than national regulators? I think not.  


Vojtech Iron,

Portfolio Manager

Conseq Investment Management, Inc.

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