European Banking Union Raises More Questions Than Answers

European Banking Union Raises More Questions Than Answers

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 14th of August.

As markets waver in anticipation of firm actions from the European Central Bank, the last politically agreed solution to the long-running euro crisis, setting up of a banking union, raises more questions than answers.

Motivations for setting up the union vary widely. South Europe wishes to shift the liability of their struggling banks to the North with deeper pockets. For the north, the union is another step towards the European federation. Some officials at the European Commission see every crisis as an opportunity to forward their federalist agenda.

On the other hand, the European central Bank has been more creative on its arguments. First, a banking union will enable stronger EZ supervision and help conduct of a single monetary policy that would diminish macroeconomic imbalances. However, no explanation on how a single regulator will check regional imbalances was forthcoming.

The second objective is more important, that of breaking the nexus between banks and sovereigns, a particularly dangerous cycle that is still playing out in the region. The final aim is to protect taxpayers through adequate contributions from the financial industry. An Euro Zone wide financial transactions tax would eliminate competitive distortions.

According to the European Commission, an EU-wide banking union should rest on four pillars; a single EU wide deposit protection system, a single supervisor for the region’s banks, uniform prudential supervision guidelines and a common resolution fund and a common resolution authority.

However, political issues remain unresolved on the proposals. The First question is how to achieve a banking union in legal terms. Constitutional changes on such scale will require time and a new European treaty.

Second, the identity of the banking supervisor is yet to be decided. Banking supervision was not included in the Maastricht treaty and many now argue that the ECB should be made the euro-wide regulator.

The final issue is what impact the single regulator will have on the financial markets, especially to those EU members outside the common currency. While many countries are waiting to sign up for the common currency, many euro-skeptic UK politicians sees this an opportunity to exit the euro.


GBP/EURO – 1.2696
GBP/US$ – 1.5687
GBP/CHF – 1.5254
GBP/CAN$ – 1.5568
GBP/AUS$ – 1.4916
GBP/ZAR – 12.7635
GBP/JPY – 123.25
GBP/HKD – 12.1728
GBP/NZD – 1.9362
GBP/SEK –  10.4698

EUR: The pound tracked lower against the single-currency yesterday after Mervyn King’s grim assessment of the British economy appeared in a weekend publication where the BoE Governor sounded dovish on the impact of the ongoing European crisis on the British economy. Sterling was subsequently sold out, pushing the GBP/EUR pair down to a low of 1.2696. The unwinding of short positions against most of its peers pushed the single currency higher across the board. The easing of 10-year Spanish borrowing costs also had a positive effect on the euro. German ZEW Survey report is likely to be in focus today while the Q2 GDP reading of the currency union is expected to reaffirm the region’s weak growth outlook. The GBP/EUR opens at 1.2686 this morning.

USD: The greenback slipped against the cable to touch a two-week low of 1.5717 yesterday over expectations of firm intervention by the ECB to bring down Spanish and Italian borrowing costs. The Bank of England may announce further monetary stimulus if the UK CPI number come in lower than expected today. However, markets will be focused on the July US retail sales data today and the reading assumes further significance on the back of weak consumer spending over the past three months. The debate on further QE by the US Fed may get muddier if the reading comes in stronger than anticipated. The GBP/USD opens at 1.5692.



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