A few weeks ago, the ECB boosted investor sentiment with talks of a banking union that would protect the depositors' money from financial crises. Unfortunately, the EU leaders couldn't even get past the initial talks.
Analysts cite three major steps in finalizing the euro region's banking union. First, the ECB must be given the authority to watch over the euro zone banks and all the others that signed up.
Then, a fund must be established to pay the existing debts of troubled banks. The establishment of a single rulebook on capital requirements and deposit protection schemes is the third and last step in forming a "banking union."
Last week the European Commission unveiled its first banking union proposal. In its website, it proposed that the ECB would watch over banks, credit institutions, and financial conglomerates to ensure that it has enough liquid capital.
While national supervisors will continue to monitor day-to-day activities, the ECB would also have the authority to take corrective actions in case some banks breach their capital requirements. The European Commission expects the ECB to start monitoring financial institutions by January 2013 and start supervising them by January 2014.
Unfortunately for the EU Commission, not all EU leaders are in the bandwagon with the proposal. For one thing, Germany and Sweden strongly oppose the idea of the ECB overseeing ALL of the EU's banks and insist that they retain control of the smaller ones. And why not? If the ECB decides to bail out the bigger banks by using the other banks' capital, then it would be difficult for smaller banks to survive.
Another problem with a banking union is that those countries not part of the euro zone could end up having very little power in determining banking policy. They will be put at the mercy of the majority: the 17 members of the euro zone.
The banking union proposal is also still unclear on the basics. For example, the proposal doesn't define what an "ailing" bank is. At which point does the banking union step in to help?
The fact is, the banking union proposal is very barebones, and there is still a lot of ground that needs to be covered. As a result, Germany's Minister of Finance has declared that the European Union probably won't meet their January 2013 deadline for finalizing the proposal.
Investors, however, are getting impatient. Haste may make waste, but time is also money. It won't be long until the optimism that stemmed from the Outright Money Transactions program of the ECB and the open-ended QE3 of the Fed start to fade and market participants focus on the unsolved fiscal problems of the region again.
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