28 Jun 2012

European summit: sorting out the banks

With Barclays under pressure after admitting trying to manipulate key lending rates, Channel 4 News looks at the measures the eurozone is proposing to reform banking.

EU leaders, including David Cameron, are meeting in Brussels to discuss the debt crisis in the eurozone.

It is the 20th EU summit since the crisis began in 2010. Since then, Ireland, Portugal and Greece have been bailed out by the EU and IMF, but have had to agree to austerity programmes – tax increases and spending cuts – in return for this financial support.

The plight of Spain’s banks is now top of the agenda, with 100bn euros made available to prop them up.

Banking union

The summit will discuss a banking union, made up of a so-called resolution fund to finance future bank bailouts, and a eurozone-wide deposit scheme to deter bank runs, where money is taken out of a vulnerable institution and invested in a supposedly safer one.

Assuming it is ever adopted and does what is intended, the resolution fund would ensure that bad loans made by banks in one eurozone country would be covered by all eurozone countries.

A pan-eurozone deposit scheme would mean that money held in one bank is considered as safe as cash in another institution.

The think tank openeurope believes a bank resolution fund and deposit scheme would need to be backed up by at least 600bn euros to be credible and that a “banking union, even in an optimistic scenario, is years away”.

The British government is in favour of a banking union, as long as it only applies to eurozone countries.

After his meeting with German Chancellor Angela Merkel in Berlin on 7 June, the prime minister said: “I can understand why eurozone countries may want to look at elements of banking union. Because we are not in the single currency, we won’t take part in the profound elements of that banking union.

“I wouldn’t ask British taxpayers to stand behind the Greek or Spanish deposits. It is not our currency, so that would be inappropriate to do.”

Financial transactions tax

Given the events surrounding Barclays bank, which was this week fined £290m for attempting to manipulated inter-bank lending rates, regulation of the banking system is again in the spotlight.

Germany, France and the European Commission are pushing for a financial transactions tax on share, bond and derivatives trading, with the money raised – an estimated 57bn euros a year – used to fund future bank bailouts, despite the fact that an impact assessment carried out by the commission in September 2011 concluded that a transactions tax could damage output and cause job losses.

Following the Barclays scandal, Europe’s banks were hit by falling share prices on Thursday in an apparent response to events in London.

The UK government is strongly opposed to an EU-wide tax of this kind, fearing that it would have a disproportionately negative effect on Britain because of its comparatively large financial services industry.

More than a million people work in financial services in the UK; a third in London, the rest in cities including Edinburgh, Leeds, Manchester, Glasgow and Birmingham.

Raoul Ruparel, head of economic research at openeurope, told Channel 4 News that money raised by a financial transactions tax could be used to finance the resolution fund.

He said: “The clear suggestion is that it will be funded by the financial sector in some way and given the fact that France and Germany are so supportive, it seems logical that they may suggest it as a good way to get funding from the financial sector for the resolution fund.”

With Britain opposed, it could not be adopted across the EU, but could be introduced in other countries under the EU’s so-called “enhanced co-operation procedure”, as long as nine countries agree.


The latest sticking point is Italy, whose prime minister Mario Monti has said he will not back the financial transactions tax unless there is agreement to use the EU’s bailout fund to buy the debt of countries like his own which are paying painfully high interest rates to borrow money.

This may simply be Mr Monti’s bargaining position, but as the eurozone’s third largest economy, Italy has real clout and could deal it a fatal blow if it chose.

Raoul Ruparel said: “They need nine countries to do this, but it would be very hard to do this without Italy involved. I’m sure France and Germany are not too happy about it.”

The EU doesn’t want this summit to have a flat ending – read Gary Gibbon’s blog.