Eurozone banks are at risk of fragmentation and are turning away from cross-border activity, Reuters reported.
European Central Bank Vice President Luis de Guindos shared his thoughts on the issue on Thursday (May 16), saying that with national rules still hindering consolidation across borders, the sector is fragmented, which means lenders can’t compete with larger global peers. It also means banks are forced to rely on their home markets and are tied to their local economies, which creates a “doom loop” between banks and their sovereign countries.
“Euro area-based banks have substantially reduced their cross-border claims since the crisis, and about 60 percent of banks’ total exposures are to their home countries,” de Guindos said. “This is worrying at a time when the political momentum behind completing the banking union is fading. This may lead banks to refocus their activities on their domestic markets, as they anticipate that the banking union will remain incomplete, resulting in further fragmentation.”
Among potential solutions are that a European safe asset is created, he said, a proposal that has been put forth by the bloc’s risk watchdog but has not been looked at too closely due to German opposition.
The fear from Germany is that the country’s taxpayers would have to eat the cost of other countries’ so-called financial irresponsibility. This is also the reason Germany doesn’t want to support a eurozone deposit insurance scheme, which would help with cross-border reach.
One of the options being talked about for a safe asset is a synthetic bond, issued by a private investor and backed by the sovereign debt from each member. This would tie the bond to the performance of the debt without the legal burden on the government.
“If well-designed, such a European (safe) asset could become the benchmark for investors in EU capital markets, reduce the incentives for capital flight on national bonds within the euro area and contribute to lowering risks on banks’ balance sheets,” de Guindos said.