HUB on Changes in the European Financial System

The Croatian Banking Association today presented a new issue of analyses titled ‘New European Architecture of Financial Stability: Strengthening the Foundations’.

Namely, new mechanisms of financial security are being established in the EU and within it – in the Eurozone. The process occurs on three levels. The first is macroeconomic and monetary – it includes the implementation of the Fiscal Pact, the reform of ECB instruments, and the establishment of a ‘European IMF’ – the European Stability Mechanism (ESM). The second level is the banking union – common supervision of banks, deposit insurance, and a system for resolving issues in troubled banks. The third level is prudential and concerns the implementation of the new Basel III Regulation and other regulations that deal with banking operations.

The President of HUB, Zoran Bohaček, stated that the new institutions represent good news for Croatia, and the estimated benefits from the new financial security mechanisms are much greater than any potential financial costs that Croatia may incur after joining the EU and later, after adopting the euro, due to the financing of new financial stability institutions.

Among the fiscal and monetary elements, the most important are the Fiscal Pact, the European Stability Mechanism (ESM) – which began operations in October 2012, and the adjusted ECB instrumentarium, which highlights the announced operations for the purchase of long-term government bonds of countries in financial trouble (OMT).
– The mere announcement of OMT has already helped to calm stress in European and global financial markets in the short term – says Bohaček.

According to the IMF’s baseline scenario, the supply of credit in core countries falls by 2 percent from the end of the third quarter of 2011 to the end of 2013, while the supply of credit in peripheral countries falls by 10 percent in the same period. In a bad political scenario, the supply of credit falls by about 2.5 percent and 18 percent in core and peripheral countries, respectively, while in a scenario of complete policies, the rates of decline are 1 percent and 6 percent. As Bohaček states, the capital and financial potential of the ESM is determined by the subscription of 700 billion euros in capital, of which 80 billion euros will be paid in cash by 2014, and the remaining 620 billion euros upon request, which de facto means that for that part, member states provide a state guarantee that can be ‘protested’ if ESM losses exceed the paid amount.

Shares are distributed among members according to the formula for capital subscription of the European Central Bank, which combines GDP and population criteria.
The largest individual shareholder is Germany, with a share of 27.15 percent, and the smallest is Estonia, with a share of 0.19 percent. Slovakia has the most similar share to the hypothetical Croatian share – 0.82 percent, or about 5.7 billion euros, of which about 650 million euros will be paid in cash by 2014.

The future banking union rests on three pillars: common supervision of banks, common deposit insurance, and a unified system for resolving issues in banks.