In Cyprus Rescue, Germany Forged New Vision for Bank Union

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With few exceptions, senior European policy makers agree that the euro zone needs a "banking union" to correct flaws in its makeup that have been laid bare by the region's financial crisis. Trouble is, they don't agree what "banking union" means, The Wall Street Journal reported. Most academics suggest the banking union requires three pillars: a single euro-zone bank supervisor; a single "resolution authority" to deal with failing banks; and a single safety net to protect small depositors. These three elements are necessary, they argue, to deal with two glaring weaknesses that have threatened the euro zone's financial stability. In the first, people lose confidence in shaky banks because they doubt that their government's finances are strong enough to rescue the banks. At the same time, anxieties about feeble banks undermine confidence in government finances. The second weakness is that national bank supervisors get too close to the institutions they are supposed to be policing, and treat them too leniently, to the detriment of taxpayers and sometimes other countries that also suffer when a big bank fails. A euro-zone supervisor, a separate authority to make sure the taxpayer isn't inevitably on the hook when banks are wound down, and a credible euro-zone-wide deposit-guarantee program to stop destabilizing deposit flight are all widely viewed as necessary to resolve these weaknesses. Read more. (Subscription required.)