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Is There a Risk of a Cyprus Like Scenario?

Firm Investment

Is There a Risk of a Cyprus Like Scenario?

The European Central Bank may have made some noises about its plans to bring more credit risk back into the money markets, but for many the euro area countries are not looking at a Glass Steep Road. This is because they are aware that if they over extend themselves too far and cause more problems for the banking system it could end up costing them their currency and thus driving down the value of their own stock. There are too many vested interests to allow a central bank to risk their credibility on a currency they do not know and love. This is why so few people talk about the possibility of the UK having problems with its banks being over run, and what effect that might have on the euro area as whole.

On one hand the FDI in the banking sector is not going to change the fundamental nature of the system. Some believe that it is best left on the borders and allow the market to fix itself. That would be an extremely risky move as there are too many inter connected systems and the failure of one of them can cause huge problems for the others. If there was a shock to the system it could spread like wildfire and all of the major banks would fail, which would be very dangerous for the financial system overall. Without firm investment and the continued support from the peripheral countries this will be very difficult to achieve.

There is a danger that the banking union, built around the common interest of all the members can lose all its credibility if it moves too far in instituting new measures that are outside its competence. This is why so few politicians and officials are talking about the possibility of a supervisory board being set up to oversee any new activities by the bank supervisors. The most likely scenario is that a supervisory board of this nature will be established, or brought in to oversee, the activities of any one particular bank, but not all of them.

It is worth remembering that the supervisors in question are firms, banks, or central banks that are based in the euro area countries. They are not banks in any one country that are acting on behalf of their clients. The European Central Bank has an interest in seeing that the values of the various currencies of the zone are kept stable and are not subject to sharp fluctuations. In that respect, the supervisory architecture of the euro area countries has achieved what it desired in the past.

In any event, the European Union cannot do anything to change the conditions that surround banks in the single supervisory mechanism. That is the situation that is now being faced by all the peripheral countries concerned. It is also the situation that is not likely to change. It is not likely to be changed because the political leaders of these countries have an interest in maintaining a strong economic system in the euro area countries. That is not an interest in seeing that the banking union is successful, even in its present incarnation. In the single supervisory mechanism, the only way that changes can be made is through political decision.

That means that what happens at the banking union level will not necessarily change the condition of the banks that operate in the euro area. It is the condition of those banks that is the subject of discussion. That is why there is no real risk of a Cyprus like scenario playing out. That is why the banking union in the euro area countries will probably continue to be the most important economic center of the single market for years to come.