European Banking Union, EU, Eurozone and the Treaty of Lisbon

by George Hatjoullis

English: The City of London skyline as viewed ...

English: The City of London skyline as viewed toward the north-west from the top floor viewing platform of London City Hall on the southern side of the Thames. In the foreground: Dixie Queen and Millennium Time at Tower Millennium Pier. This is a 5 segment panoramic image taken by myself with a Canon 5D and 24-105mm f/4L IS lens. (Photo credit: Wikipedia)

The Treaty of Lisbon constitutes the body of law on which the EU and all its institutions are governed. Voting within the EU is either on the basis of some form of qualified majority or unanimous. Anyone keen to delve into the voting system can start here (  Suffice it to say it is not simple. Changes to the Treaty of Lisbon itself, however, must be unanimous. The question arises as to whether a workable banking union can be established without the need to amend the Treaty of Lisbon. According to Wolfgang Schaeuble, finance minister of Germany, an amendment may be necessary ( In my experience the views of Herr Schaeuble should always be given extra weight.

The banking union seeks to put into place a unified framework for regulating banks. In particular it seeks to put into place a framework for resolving failed banks and circumventing any systemic implications arising from any such failure. The primary objective is to ensure failure does not occur but this is impossible to guarantee without negating the nature of banking. The next objective is to ensure that moral hazard does not enter bank decision-making. No bank should be too big to fail and the various stakeholders in banks should not expect to be bailed out. The lesson from Cyprus is that senior bond holders and uninsured depositors are at risk from bank failure. This was always true in principle but rarely in practice; until Cyprus. Finally, the insured depositors will draw their guarantee from a centralised body which will be collectively funded (probably on the same lines as the ESM).

The structure separates the banking system from the sovereign. This is an important innovation as anyone that is familiar with the eurozone crisis will appreciate. Bad banks have been the problem of the eurozone member state and have dragged the otherwise solvent sovereign into debt. Insolvent sovereigns have infected otherwise healthy banking systems which habitually hold large amounts of sovereign debt. The separation alone will remove a large systemic instability within the eurozone.

However, herein lies the problem. The needs and the common interests of the eurozone are clear but the overarching Treaty of Lisbon relates to the EU. Not all EU members are part of the eurozone and may have views and interests that do not coincide with those of the eurozone. The UK is a case in point.

The City of London is a special UK institution. Despite the popular demonization it contributes a large amount to the UK economy. It is unclear whether removing the too-big-to-fail tag from the City will be beneficial to the UK. The use of City banks for large transactions might be adversely affected if uninsured depositors became subject to risk in practice. The taxpayer bailout of HBOS and RBS was not protecting banker bonuses but rather uninsured (and perhaps insured) depositors. Indirectly, they were protecting the income the UK generates from the City.

Of course, the devil is in the detail and the shape of the proposed European Banking Union will need to be seen before any final judgement can be made. It may indeed make the City a more desirable place to do bank business. However, I doubt it. The incumbent UK government, whatever its political persuasion, will have to look closely at the implications for the City before agreeing to any unanimous vote on banking union. It will also need to consider the electoral impact given the growing euro scepticism in the UK. The irony is that the unanimous vote will need to get the approval of Cyprus, if it is still in the EU, when the vote is taken.