Buying long, selling langer: Why the decision on a banking union is important

The government apparently finds it difficult to decide whether to support Danish participation in the EU’s banking union or if it should hold off. There’s no doubt that it’s the most important decision since the referendum on Denmark joining the Eurozone, as a ‘yes’ to participation in the banking union would be the first step towards participating in a fiscal union.

Socioeconomic consequences
In any case, it seems like a sham that the Justice Ministry apparently has to take a position on whether joining the banking union would be a relinquishment of sovereignty. The reality is that we would entrust to the ECB and an independent European body the decision of whether Danske Bank, for example, should be saved or liquidated if it were to theoretically become distressed.

In the real world then, it would be bodies other than the Danish government and Parliament that could take decisions that would have severe negative socioeconomic consequences.

Lars Rohde, the head of the Danish central bank, was quoted in an interview on January 19 saying the following: “Roughly speaking we can say that big distressed banks in the future can go bankrupt in peace. That means that neither taxpayers nor customers of these distressed banks will be affected. That gives more security and credibility about the crisis management of these failing banks.”

If it ain’t broke
Seen from the outside, the central bank head’s view seems somewhat theoretical since a liquidation of Danske Bank would affect over a third of all Danish bank loans. They would have to go into a financial stability scheme or be transferred to other banks – but which ones?

This is precisely the reason for the ‘too big to fail’ debate – that the socioeconomic consequences will be too big, whereby the national authorities almost always choose other solutions.

In fact, today in Denmark we have a crisis management mechanism that has shown itself to function excellently, and the ECB’s stress test of the big Danish banks has actually shown that there are no problems here.