This banking crisis could easily come closer to the United States

Unrest in the banking world – including the collapse of several mid-sized US banks, Swiss Credit Suisse and 'tipsy' Deutsche Bank – is rekindling calls for the completion of a so-called banking union. Although there is central supervision of banks in the EU – from the ECB in Frankfurt – intervention at a central level is still not possible. It is reserved for the national authorities of the Member States.

Finance Minister Khak The EU wants a guarantee fund, a comprehensive deposit guarantee scheme to bail out all banks at risk of failure. However, the northern member states, led by Germany, were reluctant to guarantee Italian banks, which were heavily burdened with Italian government debt.

Domino Fear

In Northern Europe people are afraid of Italians Doomloop, the close relationship between the government and the banks regarding the financing of the national debt. If one bank gets into trouble, the risk to other banks is a domino effect.

Whether or not to complete the Banking Union is part of the general debate between federalists who want to turn the EU into a United States of Europe and nationalists who see the EU as a partnership of sovereign nations. At first glance, banking union is necessary for the proper functioning of the European Monetary Union and the stabilization of the common currency, the Euro.

Backstop or no backstop

The EDIS (European Deposit Insurance Scheme) debate has been going on for 10 years. EDIS aims to replace the existing Deposit Guarantee Scheme, which covers banks themselves Through Resolution Fund All depositors in the Eurozone are guaranteed a maximum of €100,000.Common backstop', which is guaranteed by the ESM (European Stability Mechanism).

If the resolution funds of the banks are insufficient, the ESM, the collective contribution of the member states, i.e. the taxpayers, must take action. It's 'Bones of CompetitionIn the banking union debate.

Who is responsible for this 'bail-out'? After a while the discussion started Credit and banking crisis In the year 2008. The then head of the Eurogroup, Jeroen Dijsselbloem, led the eurozone's finance ministers' debate, which, as a first step, was able to ensure that shareholders would pay the price early in the event of a bank failure. Government, debt crisis or taxpayers. Bondholders were second in line, followed by the government as the last resort. However, the system is only in the case of so-called banks. In his view, unorganized banks should go bankrupt like other institutions. Banks in trouble due to excessive risk taking – unhealthy banks – Don't save By the government.

Deposit Guarantee Scheme

Many thought a second financial crisis was unlikely. Banks now have more buffers than that, better capitalization and stricter supervision. But American SVB Bank in California collapsed. The bank did not survive a 'bank run'.

Depositors are guaranteed up to $250,000 in the US (only up to 100,000 euros in the eurozone), but financial authorities do not consider this sufficient. Fearing contagion to other banks, all depositors were fully compensated.

SVB got into trouble only because the FED raised interest rates. It is now 4.75% in the US. SVB does not hedge interest rate risk (adequately). Hedging. When the bank was running, it had to quickly sell collateral to pay depositors who withdrew money from their accounts.

Deutsche Bank

Collateral is mostly long-term treasury bonds. The rise in interest rates made them less valuable, which meant the bank suffered substantial losses and the collateral was insufficient to pay the bank's customers.

Big(er) banks in the U.S. say they have addressed their interest rate risk and are not afraid of a potential bank move. Nevertheless, fiscal officials erred on the side of caution A general warranty Issued to all depositors of all banks in the United States.

Too big to fall?

The unrest in America spread to Europe. Banks whose lending has long been dubious have run into trouble. The first victim was Credit Suisse. The 'trigger' CS should write interest on the SVB. Financial authorities in Switzerland also acted quickly, fearing a contagion. Fellow bank UBS was more or less forced (with a Swiss state guarantee) to take over the competitor.

The peculiarity is that the bondholders (subordinated loans) in the Swiss system were the first to see their money go up in smoke. In the eurozone, shareholders act first.

At the time of writing, Deutsche Bank is under fire. DB has been seen as a problem bank for some time. It has lost a lot of money in its failed attempt as an investment bank and is undervalued Assessment. However, it is a legitimate bank and is saved by the central government at all costs.

A storm in a teacup or real danger?

I cannot yet predict whether the unrest in the banking world will continue or the fire will die out. According to ECB President Lagarde, banks will be in better shape than ever Financial crisis In the year 2008.

She says let's sleep peacefully. But interest rates have also risen in the euro zone, and banks have had to write down their government bonds, which have fallen in value. At least those who do not hedge interest rate risk. A bank run cannot be ruled out in the Eurozone either. Negative sentiment can spread quickly and is difficult for governments and central banks to contain.

That is why Minister Kock (read: D66) is looking at the possibility of launching EDIS, arguing that completing the banking union is the best solution to the banking crisis. He recommends an ESM guarantee for all banks in the eurozone. However, with the exception of D66, the Allies are unwilling to go that far, at least if several conditions are not met first.

For example, the balance sheets of Italian (and other) banks no longer contain government bonds (largely). A possibility Doomloop should be excluded. The current official Dutch commitment is still 'no risk sharing without risk reduction'. In other words: no blank check for Southern Europe.

Never waste a good crisis

So it is not certain that the unrest in the banking world will lead to full banking union – the desire of the federalists. However, Germany must move, which is not clear with the liberal FDP's Lindner as finance minister. Most Northern Member States Don't want to pay for it To bail out Italian banks, the Italian government was saddled with government bonds to finance the country's massive mountain of debt.

From the nationalist point of view, each member state is responsible for its own fiscal policy, keeping the national debt manageable, or more bluntly: each member state must own its own clothes. Bailouts Other governments or banks of other member states are anathema.

But who knows. The European Union tends to travel through the crises on the path to a federal union. Trapped files are released during a crisis. Proverb Never waste a good crisis Found in the European Union. If unrest continues to spread in the banking world, and European system banks get into trouble and need to be bailed out by governments, calls for a European approach may be heard.

Johannes Verloot It was associated with the Dutch Ministry of Foreign Affairs for almost four decades in places such as Jakarta, St Petersburg and Paris.

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