Europe needs to immediately create a central deposit insurer to back the eurozone's banks or run the risk of seeing bank runs damage its financial sector, says Sheila Bair, former chair of the U.S. Federal Deposit Insurance Corporation.
Policymakers in wealthy nations such as Germany oppose creating one body backed by all nations to prop up troubled banks on the grounds it asks German taxpayers to pay for saving banks in countries such as Greece.
That arguably may be true, but Germany must realize that bank runs will inflict more damage on the European economy than creating a central deposit insurer and resolution authority like the FDIC, which guided the US banking system away from collapse amid the 2008 financial meltdown, Bair contends.
"Like it or not, German banks have significant exposure to Southern Europe. And while Deutsche Bank managed itself well during the crisis, it and other private German banks benefited mightily from government bailouts that prevented the failure of mismanaged institutions," Bair writes in a Fortune column.
"Time and again, obvious reforms have been stymied by the parochial interests of individual member nations. As Europe's government leaders have fiddled, their banking system and economy have slowly burned. Years of byzantine discussions and half-baked, incremental measures have resulted in greater confusion about Europe's future."
The European central deposit authority would resemble the FDIC.
European banks would fund the deposit insurer and give the new body power to borrow from either the European Central Bank (ECB) or Europe's bailout facility, the European Stabilization Mechanism Fund.
"Europe's leaders must promote the economic well-being of the entire eurozone, even if it requires short-term sacrifices on the part of member countries. A central deposit insurer and resolution authority could represent a first, definitive step."
European leaders agreed at a June 29 summit to create a central banking supervisor, though details remain to be worked out.
Concerns persist that taxpayers in one country will balk when they see their money propping up a bank in another country.
Eurozone finance ministers currently are meeting in Brussels to brainstorm ways to firewall and extinguish the debt crisis, now more than 2 years old.
Borrowing costs in Spanish and Italian government debt auctions continue to soar, reflecting sentiment that investors view the countries as risky venues and, therefore, want more in return in exchange for financing both governments.
Some in the eurozone have expressed concern the Brussels meeting won't hammer out details from the framework agreed upon at the June 29 summit.
"This is very much the follow on from the summit, but it doesn't mean all details can be set down," one eurozone diplomat tells Reuters.
"The issue of ECB supervision is a complex, longer-term issue and not one that can be decided in a few hours."
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