Bank Unions in Europe - Case Study Example

BANK UNIONS IN EUROPE Table of Contents I.References 9 Introduction Banking union in the E.U (Europe union) is the exchange of obligation regarding managing an account strategy from the national to the EU level for nations within the European Union. It was started in 2012 (Zwass, 1979) as a reaction to the Eurozone emergency. The Eurozone emergence was an emergency European Union member’s summit that happened in an attempt to try and prevent the Greece predicament from getting out of control. Greece through it prime minister, Alexis Tsipras, (Zwass, 1979) had attacked the IMF (International Monetary Fund) policies of withdrawing its talks as pressure built from Greece’s creditors .also Greece stock market depreciated by an 9 percent. The inspiration for a banking union was the delicacy of various banks in the Eurozone, and the distinguishing proof of endless loop between credit conditions for these banks and the sovereign credit of their individual home nations. In some countries the private debts that arose due property bubble were shifted to ascendant liability as an outcome of the banking systems bailout and government reactions to moderating economies post-bubble. It is due to the weakening of credit facilities at the time of the Eurozone crisis and fear of financial instability among the member states. This led to the need for interdependence between financial stability, banking policy and economic integration that saw the need to establish a banking union. Interestingly the banking sector of individual States faces the risk of likely marginalization as other countries in the union are trying to integrate The individual governments find it necessary to retain the single market to its country continues to dominate the financial markets in Europe. Additionally, the banking union in Europe is immediately needed to revive the stability and credibility of the banks system within the Euro area. There has been a continuous vicious cycle of the sovereign countries in Europe and the banks themselves. For example, some countries are unwilling to participate in the activities of the Banking Union, for instance, the UK. The sabotage by the UK has made some countries too to wish to exit the Union because of numerous challenges. The Europe’s financial banking sector has been going through times of polarised tensions Starting 2014, the banking union primarily comprises of two primary activities, the Single Supervisory, and Resolution Mechanism, are based on the "single rulebook" ,or basic monetary administrative structure. The “single rulebook” comprises of an arrangement of authoritative writings that every single money related foundation (counting more or less 8300 banks) in the EU must agree to. These principles, besides to other things, set down capital necessities for banks, guarantee better insurance for investors, and direct the aversion and administration of bank disappointments. (Zwass, 1979) The Single Supervisory Mechanism (SSM) has place the European central Bank as the focal prudential administrator of monetary establishments in the euro range (counting pretty nearly 6000 banks) and in those non-euro EU nations that decide to join the SSM. The ECB straightforwardly directs the biggest banks, while the national administrators keep on monitoring the remaining banks. The primary undertaking of the ECB and the national chiefs, working firmly together inside of an incorporated framework, is to watch that banks conform to the EU managing account rules and to handle issues at an early stage. SRM (Single Resolution Mechanism) applies to secured banks by the SSM. In the situations when banks come up short notwithstanding more grounded supervision, the instrument will permit bank determination to be overseen successfully through a Single Resolution Board and a Single Resolution Fund, financed by the managing an account division. Rationale Banking unions have thrived in history and have achieved high credits over the past decade. The initiation of the Banking Union in Europe has enhanced our understanding of its impact on the euro areas. (Rostowski, 1995) The banking union project in Europe has improved the stabilization determinations in the Euro region which is regarded to be a perquisite for economic growth. It has given a significant indication of the willingness of the member countries to forge ahead as a group since they are unified. It also provides an efficient antidote to the state debt crisis whose significant determinant all time has been inadequate confidence in the single currency plan. Also, the Banking Union and the national and European policies precisely the monetary policy measures that were recently decided by ECB Governing Council is currently contributing to the credit condition normalization of households and firms. (Rostowski, 1995) This has been achieved by the regular analysis of balance sheets of the largest euro area banks encouraged transparency and disregarded the doubts available about the respective banks resilience since the SSM launch. Research predicts further development in this field as the SSM has shown progress in the harmonization of business practices and supervisory. This reduces investors’ risk perception. The banking union in Europe has also revealed a strong instinct to the effectiveness and efficiency of the financial systems in Europe thus nurturing and promoting fair completion in this region. For instance in Italy, a verdict on the governance of the cooperative banks was an initiative that has seen the Italian economy develop and grow to the greatest European standards of effectiveness and efficiency. Challenges There are many challenges that face the banking unions of Europe. Research has it that many of the challenges that are facing European business unions are more extensive and different. They pertain to the solemn governance of the European Banking Unions. The banking unions in Europe lack an agreement on the ultimate principles which are meant to rule the banking unions which is entirely accepted by member states. This is a challenge because either the rules/regulations set upon in the respective treaties are not completely understood or that they are wanted at all. At times the questions that are often raised with regards to the rules are never taken into account too. (Rostowski, 1995) This is evident from the public budget rules and also the independence of the banking unions of Europe primary determination for price stability. Adapting to new waves of regulation since the 2009 crisis where banks were required to go through the process of deleveraging and restructuring. Banks had to do away with their impaired assets and non-core business values .they were simply expected to improve the quantity and quality of their operating capital. (Rostowski, 1995) Many banks had to make the hard choice of how issue out assets and the core business values to maintain. The banks had to reduce the risk levels in their balance sheets. (Canzoneri, Grilli and Masson, 1992) This leverage ratio put limitations on the banks size of the balance sheet and trading and banking activities. Profound structural changes are also a challenge to banks union. With the ever growing technology, customer’s preference are subject to evolve over time .i.e. the rise of the internet and mobile banking restrictions into banking industry are reducing. There are is a rise of peer to peer loaning and technology companies offering banking services. An example is a way PayPal is rising as a retail payment gateway in business that were previously dominated payment gateways by banks Consequently, the banking union in Europe is increasingly facing challenges that limit its practical operations. The European banking union is facing a challenge of estabilishing the Economic and Monetary Union in Europe. The challenge has led to a crisis of sovereign debt, financial sector weakness, and imbalances in macroeconomics and low growth rates. It has led to the slow nature of the road to recovery of the economy. One country, Spain is not finding it easy. Its yields in the ten-year bond have skyrocketed to a very high level in Europe. It has resulted in its banking sector becoming be seriously indebted. The recapitalisation has thus become unavoidable. According to a report of 2014 on the crisis in the Euro area, Spain and by extension all the countries in Europe is facing a risk. The challenge is the problem resulting from the indebted sovereign countries and the banks that are struggling. The challenge has jeopardized the success of the European currency. The rationale behind this challenge is because the major countries like Spain face a plight that risks wiping out the resources meant to rescue them. It has resulted in a continuing existence of a vicious cycle between the independent countries, and the banks found in these states. The crisis in the Eurozone, as reported in the general media, has been due to the way the European Central Bank (ECB) is itself not well structured. As a last resort lender, it is not that well equipped to carry out its duties effectively. A major issue with the European Central Bank is that it lacks enough information on banks. It makes matters even worse since it is not in a position a to make an intervention on the financial crisis facing states in Europe. The European Central Bank is, for example, unable to restructure and recapitalise the banking sector in Spain effectively. More pressure is on the European Central Bank to make an intervention and salvage the situation. However, it has been late in strategizing on ways to save the situation. The delay in its reaction has further complicated matters for the already ailing European Union banking sector. Another challenge the banking Union of Europe is facing is the imbalances in the macroeconomic state of the countries in Europe. The rationale behind the macroeconomic imbalances has been as a result of the European Union need to protect its members. It has lead to making of substantial savings thus indirectly contributing to the crisis facing the banking union in Europe. The National Governments of the independent countries in the Euro Zone also pose a challenge to the Banking Union in Europe. It is because the countries independently have their banking and monetary policies that might collide with the European Union policies. The European Banking Union faces thus faces the question of whether it should just limit itself to the Eurozone only or the individual states. Finally, the banking union of Europe faces is that it lacks the authority and power to resolve and supervise all the banks in its area of jurisdiction. It creates a challenge to it since it will be unable to discharge its mandate fully. It leads to systemic problems arising in the financial sector. When these problems arise, the blame will be on the Banking Union of Europe yet it is in no position to effectively govern the whole banking sector in Europe. Recommendations of what can be done to overcome the challenges The Banking European Union needs to be elevated to supervise all the banking activities in Europe. It should be given the mandate to be able to regulate how the banks in the individual countries operate. Additionally, the European Central Bank should be made a to be the body with the authority to make resolutions on matters affecting all the Euro Zone banks. It will enable it to discharge its mandate effectively fully as a last resort lender. Finally, to address the macroeconomic imbalances challenge, the banking Union of Europe should permit the functioning of the banks’ Single European Market. It includes the capital markets of intra-banks .it will enable a seamless flow of funds between subsidiaries and parent banks. It will reduce the adverse effect of the multiplier in the fiscal policy Remedies There are various remedies to solve this challenges that are facing the European Banking Unions. They include: forming a board to formulate the rules to be followed by this respective union. This will prevent rather reduce the ambiguity are of the banking unions and some of its member countries. A stronger and independent supervisor body that ensures that all the banks in the Eurozone apply and abide by the applied set of rules. The supervisor (European Central Bank) should not have any of the member national interest as this will result in weakening the link between national finances and banks. This might cause risks in financial stability. A prudent measure should be taken to those banks that do not follow up with the set of rules. (Dixon, n.d.) The bank unions should also keep with the upcoming trends and technology so as to remain relevant to the market. An example feature that bank unions should have quick uptake to in technology is internet banking and mobile money services. Bank unions should keep on reviewing and changing their policies so as to fit the ever dynamic markets and preferences. There is an overarching challenge. The progress towards European integration is crucial. Achievement of unification often is achieved through constant behavior on the portion of all sectors involved. Therefore to diagnose this it’s the obligation for each and every member country to factor in the essence to reduce deleterious spillovers from one respective economy to the others. Conclusion From the above discussion it can be deduced that because of the budgetary emergency that rose in 2008, the European Commission sought after various activities to make a more secure and sounder monetary division for the single business sector. These activities, which incorporate more grounded prudential prerequisites for banks, enhanced investor insurance and guidelines for overseeing coming up short banks, frame a solitary rulebook for every money related performing artist in the Member States(28) of the Union. The single tenet discovery is the establishment where the Banking Union operates. From the research findings done by various scholars suggest that though a lot has been accomplished by the Bank Unions of Europe there is still a lot remaining to stabilize and make effective the Eurozone financial market. Hence, to achieve the primary goals of the Bank Unions, piecemeal policies should be avoided. This will enhance the reinforcement of mutual trust with regards to the international level. Finally, a wide range view of all the trade-offs that are involved in some policy measures are also prerequisite so as to the stability of distinct financial institutions. This can only work if the respective union measures up to a critical objective of safeguarding the accessibility of economic growth and investment resources. Interestingly the banking sector of individual States faces the risk of likely marginalization as other countries in the union are trying to integrate. It will result to limit the single financial market across Europe’s banking Authority. It threatens a state’s activities thus the need for the government has to give its citizens assurances. The individual governments find it necessary to retain the single market to its country continues to dominate the financial markets in Europe. It has created a euro zone crisis on the banking sector, thus the need to reform and regulate the operations of the banking sector in Europe. To approach such challenges, the European Banking Union needs to involve elements that will make the European banking sector effective and efficient. The banking union in Europe is increasingly facing challenges that limit its practical operations. I. References Green, D. and Petrick, K. (2002). Banking and financial stability in Central Europe. Cheltenham, UK: Edward Elgar. Zwass, A. (1979). Money, banking, & credit in the Soviet Union & Eastern Europe. White Plains, N.Y.: M.E. Sharpe. Rostowski, J. (1995). Banking reform in Central Europe and the former Soviet Union. Budapest: Central European University Press. Clausen, V. and Welfens, P. (2001). Asymmetric monetary transmission in Europe. Berlin: Springer. Canzoneri, M., Grilli, V. and Masson, P. (1992). Establishing a central bank. Cambridge [England]: Cambridge University Press. Read More