The creation of a banking union is critical for the survival of the eurozone unless we were to move quickly to full fiscal (and hence political) union; an unlikely prospect. This is how the global chief economist at UniCredit motivated his opinion, supporting the proposal of the European Comission which will be considered today.

According to Nielsen, without fiscal union, sovereign funding costs will continue to vary according to market perceptions of risk. “But without a banking union banks are de facto contingent liabilities of their own individual sovereign state” writes the global chief economist at UniCredit in his comments, published in “Financial Times”. There Nielsen points out that although the lack of agreement concerning the common mechanism for bank resolution or recapitalisation as well as the shared bank deposit guarantee, their realization will undoubtedly follow.

In the article for “Financial Times” Nielsen refers to at least two different implications in case there is no agreement on the creation of a banking union for the institutions of the eurozone. “First, when sovereigns and their banks are linked, investors (rightly) charge a premium on banks’ funding costs , which reflects the sovereign risk of the individual’s bank home country. Needless to say the higher funding costs for banks in the periphery translate directly into higher borrowing costs for the private sector in those countries. This implies monetary conditions for businesses and households in the periphery are now a whopping 300 basis points or so tighter than those facing their competitors in core Europe.” thinks Nielsen.

On a second place he places the fact that for national bank supervisors, banks being contingent liabilities of the individual sovereign imply an incentive to limit "their" banks' exposure to anything seen as risky, including anything with a peripheral sovereign backstop, for example banks. “As a result, several national supervisors now restrict capital movements to the periphery, occasionally forcing repatriation of capital and exacerbating the differences in monetary conditions between eurozone countries.” arguments Nielsen.

He is explicit that a monetary union cannot function with internal capital controls and large differences in financial conditions - depending on country of residency - for the private sector. A banking union is therefore urgently needed.

”The first step, a common bank supervisor, is needed because banks, like most of the corporates they serve, have long ago moved from being national to international businesses, making the existing national supervisors model obsolete. While the need for a common bank supervisor has been understood, concern has been raised about the two other components of a banking union: a common bank resolution or recapitalisation mechanism and deposit insurance. Such concerns are misplaced.” writes Nielsen.

According to him, if the banks entering the common regime are all solvent, then we are not mutualising liabilities, but assets, and it would be the task of the common supervisor to intervene before that status is lost. “And if something goes wrong for a bank, the cost to society should be limited via a tougher resolution regime than the one employed in, say, Ireland, where creditors came out whole, leaving the entire cost with the Irish taxpayers” points the chief economist at UniCredit and says that the new pan-European authorities could take a leaf out of the Danish playbook.

At the end of his article, Nielsen recommends until the banking union is established, regular meetings to be arranged between national supervisors, finance ministers and the ECB to tackle the inconsistencies between their actions. “Specifically, they should address how restrictions on capital movements impair the ECB's transmission mechanism, and hence the prospect of an early recovery in growth in the eurozone periphery. The aim is clear, but it will take time to get there” he summons up.

More information for media:

UniCredit Bulbank, Identity & Communications Department

Viktoria Blajeva, Phone: + 359 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch

Ekaterina Ancheva, Phone: + 359 2 9264 963, flbufsjob/bodifwbAvojdsfejuhspvq/ch

Magdalena Ivanova, Phone: + 359 2 9232 528, nbhebmfob/jwbopwbAvojdsfejuhspvq/ch