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From this side of the Atlantic, the European Union (EU) can seem like a weird thing—most of us aren’t exactly sure when it started, how far it stretches or even what it exactly is. What we do know is that it’s a case study in constant evolution: It dates back to at least the ’50s, when six nations formed the European Coal and Steel Community and, later, the European Economic Community. However, the current European Union actually takes its name and primary structure from the Maastricht Treaty of 1993. The monetary union, the source of the Euro, was born in 1999; the constitutional basis for the EU, the Treaty of Lisbon, arrived 10 years later; and countries are still joining (Croatia became a member only last year).
Of course, as a unified entity, the EU still seems a little bit strange. But the potential for superpower status is clearly there, which may be one reason why it was awarded the Nobel Peace Prize in 2012.
And then we get to March 2014. That’s when, after protracted negotiations, the last piece of the puzzle fell into place for an all-purpose European banking authority that will, at least by design, be better equipped to handle industry crashes, especially the kind that might have a domino effect. Most importantly, the entity has the regulatory authority to restructure, sell off or even shut down failing banks.
The move is a direct response to recent disasters that had catastrophic consequences for many institutions. Even entire nations have been similarly affected, most famously when a series bank failures and attempted bailouts virtually bankrupted Ireland and sparked major scandals. And whenever this happened, of course, other organizations and governments had to step into the breach, forcing taxpayers in one country to pay for the mistakes of financial services corporations in others.
To its credit, the new entity is designed to look forward rather than just back. The European Central Bank (ECB) has already been doing due diligence on larger financial services institutions to look for potential minefields. It won’t be a huge surprise if it does find problems. Meanwhile, the Resolution Board, as it’s called, has a two-pronged mandate.
First, it takes the power of supervision away from local regulators, who might be too close to the corporations they’re supposed to be monitoring. (They might also turn a blind eye to avoid making national institutions look bad.) More important, perhaps, is the other function, which entails setting up a fund that is empowered to take essentially unilateral action on lenders that are deemed to be in trouble. In these instances, the fund can order a restructuring, sale or even shutdown (in some cases there will be other steps necessary). The fund will have in its coffers $76 billion to conduct these rescues as needed, with the money to be raised through levies on the industry.
The intent, of course, is to protect taxpayers from having to foot the bill for bad decisions made by bank executives. It should also help send a message of stability to financial markets everywhere. These are laudable goals, surely, but will it work?
To be clear, the Resolution Board doesn’t even exist yet. It won’t launch until next year, and contributions to the fund will start the year after that. There are also objections being raised to the effect that the agreement doesn’t go far enough. Some argue that in order to be truly effective, the new entity should be completely independent, rather than tied to an industry authority like the ECB, which has its own connections to national interests. But for those who want strong regulation, it’s clearly a start.
That brings us back to these shores. As we all remember from recent history, the United States has had its share of crashing banks, taxpayer-funded bailouts and accusations of lax regulation. Is there anything for us to learn from what the European Union is doing?
