Europe’s Banking Union: A Fragile Super Monster?

The scope of the European Banking Union is (see here):

“In response to the financial crisis that emerged in 2008, the European Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market. These initiatives, which include stronger prudential requirements for banks, improved depositor protection and rules for managing failing banks, form a single rulebook for all financial actors in the 28 Member States of the European Union. The single rule book is the foundation on which the Banking Union sits.

As the financial crisis evolved and turned into the Eurozone debt crisis, it became clear that, for those countries which shared the euro and were even more interdependent, a deeper integration of the banking system was needed. That’s why, on the basis of the European Commission roadmap for the creation of the Banking Union, the EU institutions agreed to establish a Single Supervisory Mechanism and a Single Resolution Mechanism for banks. Banking Union applies to countries in the euro-area. Non-euro-area countries can also join.”

We have analyzed a group of the 12 largest European banks. Ratios data has been used to perform the analysis. The Complexity Map is the following:

A clearer picture is conveyed by the so-called Meta-Map, in which all the bank-to-bank inter-dependencies (there are over 200 thousand in the above map) are condensed into only one link.

The resilience of this system is 62.1% (two stars) while the degree of inter-dependency is 35%. This level of inter-dependency means that the system is already significantly “locked”. Imagine now that new rules are added. These rules will affect over 8300 banks!

The idea is to restore stability.  The goal (as the memo says) is to end Too-Big-To-Fail by creating a super-huge monster. The dynamics of such super-systems is unknown. There is very little research and literature on similar subjects. No more Too-Big-To-Fail may easily end up being Too-Complex-To-Survive. The idea is to end bail-outs (governments pay using taxpayers money) but that may mean bail-ins (banks take money directly from their clients as in the case of Cyprus). Time will show.

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