Vorbereitung auf Bankenkrise: Vorkehrungen zur europäischen Stabilität[en] 

Nicolas Véron is expert on accounting and financial regulation at Bruegel, a Brussels-based economic think-tank. He was adviser to France's labour minister between 1997 and 2000.

In your recently published paper "Is Europe ready for a major banking crisis ?", you make proposals on how to manage a possible banking crisis. What are the current shortcomings of the system in Europe?

The paper is devoted to crises that are very infrequent and very serious - crises that have not happened in most European countries for decades. These include banking failures - failure of a major bank with a major cross-border component. Actually, there is essentially no precedent for such a crisis with a major cross-border component. 

So, the kind of crisis that this paper is devoted to has basically never occurred. But we have to plan for them as we know that they will occur at some point, because the banking sector has become very integrated internationally, and in Europe this is a new phenomenon. 

It has started happening in the past few years – since 2000 – and it is probably going to expand and accelerate in the years to come, for a number of reasons. We know that at some point there will be a crisis in Europe – a failure of a bank that has major operations outside its home country, what we call "pan-European banks". 

The analysis of the paper is that the current stability arrangements, which are based on the principle of national treatment, are inadequate. They will lead to more taxpayers' money being spent than necessary and to more severe drops in GDP. 

So they would lead to outcomes that are not in the best interests of European citizens, and as these crises are very big when they happen, the paper makes the point that even though it is a technical issue – even though it is an issue of crises that do not happen often – it is actually an issue of the highest political order.

The precedent that we have is a precedent in northern Europe – Sweden or Finland – in the early 1990s, or in continental Europe and the US in the 1930s, and shows how severe the social disruption can be when a major banking crisis occurs, and that high-level decision-makers – heads of state and government – have to care about this, and if they think that the arrangements are inadequate, then they should work on it. 

Do you assume that consolidation in the European banking industry will continue? The ABN takeover battle can be taken as a current example.

Frankly, it is not an assumption, it's a fact. If you look at the past three or four years, cross-border consolidation has happened and the ABN takeover just proves this is still going on. In Europe, you already have banks for which the current stability arrangements are inadequate, and this is not going into reversal. 

So how do you think these shortcomings can be overcome?

Our main proposal is to focus policy initiatives on what I call pan-European banks; that means not necessarily banks that have activities in all European countries, but banks which have major activities in Europe outside their home country. 

Basically, the proposal that I make is a two-tier framework, where you have an EU-level prudential regime for pan-European banks, and all the other banks - which is the vast majority of banks, including some large ones – would remain under the current, national-based arrangements. 

Now, how the cut-off would be determined is that the threshold is a voluntary mechanism. This is a legitimate matter for discussion. There is no perfect solution, but there are many solutions that can be envisaged.

You say that your proposal is not an entirely new one, but what has changed in the meantime?

I think that the proposal is not new, but the context is new, because the degree of integration of the current European banking market – both because of cross-border consolidation and because of financial innovation – is vastly higher than it was even a couple of years ago.

Policymakers may not yet have realised it, but we are speaking of a different market from that which was the case when the Lamfalussy Committee was delivering its report in 2001, or when the Financial Services Action Plan was decided in 1999 or even being implemented in early 2000. 

If you ask me, there will be more and more such banks. We already have a situation which calls for a different policy framework that we could have had until very recently. Therefore, it is not a new debate, but it is a new context. That means that it displaces the balance of arguments, and if you ask me, I think that European governments were right to be cautious about supranational arrangements in this area until the late nineties or even the early 2000s. But I think that a decision is needed now, because the context has changed. 

The current crisis has shown that financial crises are for real. Even though it is a very different type of crisis, I think it might still help to raise awareness in policymakers that financial crises are a serious matter for policy, and that preventing them and putting in place institutions that can adequately deal with them is very important.