European Banking Nationalism: State Power and Troubled Banks

184 Pages·2022·4.159 MB·English

by  Shawn Donnelly, Gaia Pometto

EUROPEAN BANKING NATIONALISM
This book compares the different expressions of, and outcomes from, banking
nationalism in two European countries to draw wider conclusions about
the consequences for Banking Union in Europe and to show how national
governments deal (or fail to deal) with international commitments.
It reveals how and why one case—Spain—managed to tackle failing banks
within EU Banking Union regulations even before they became written in EU
law, while the other—Italy—had more persistent problems. The book argues that
Spain demonstrates a successful case of liberal economic nationalism, typified by
aggressive, early state intervention to restructure Spanish banks, and help from
the European Stability Mechanism even in the face of local political opposition.
Italy, meanwhile, suffered from the weaker, delayed intervention which forced it
to confront European institutions with demands for special treatment as a means
of externalizing its own internal weakness.
This book will be of key interest to scholars, students and professionals in
economic policy, Economic and Monetary Union and Banking Union in Europe,
European and global governance, European/EU studies, European public policy,
European public administration and EU law, as well as professionals working in
the banking sector.
Shawn Donnelly is Assistant Professor of European Economic Governance at the
University of Twente in Enschede, the Netherlands.
Gaia Pometto is an independent researcher based in Amsterdam, the Netherlands.
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EUROPEAN BANKING
NATIONALISM
State Power and Troubled Banks
Shawn Donnelly and Gaia Pometto
First published 2023
by Routledge
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© 2023 Shawn Donnelly and Gaia Pometto
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and 78 of the Copyright, Designs and Patents Act 1988.
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British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-032-36938-9 (hbk)
ISBN: 978-1-032-36940-2 (pbk)
ISBN: 978-1-003-33458-3 (ebk)
DOI: 10.4324/9781003334583
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CONTENTS
1 Economic nationalism and Banking Union 1
2 Banking Union 15
3 Economic nationalism and EU state aid rules 33
4 Interests, institutions and implementing EU law 48
5 Banking nationalism in Spain 79
6 Banking nationalism in Italy 106
7 Conclusions 162
Index 175

10.4324/9781003334583-1
1
ECONOMIC NATIONALISM
AND BANKING UNION
Does economic nationalism pose a problem for Banking Union, and for the
economy more broadly in Europe? If so, how strong is the problem, where does
it come from, what specific pressures come to bear on European institutions,
and can anything be done to mitigate it? One measure of economic nationalism
revolves around the question of who is permitted to own and control banks in
EU Member States. This question became particularly pressing for Europe in
the aftermath of the Great Financial Crisis (GFC) of 2008, as state aid for banks
spread throughout the European Union (and elsewhere), and is being repeated
again during the Great Lockdown (2020–). State aid can keep national owners
in control and make foreign investment or takeovers unattractive. How strongly
is state aid motivated by nationalist impulses? Are there other impulses, such as
protecting local varieties of financial capitalism, or even local varieties of capital-
ism more broadly conceived that limit economic and financial linkages across
national borders? How have these linkages developed in the context of EU law
and regulation to limit and roll back the increased tendency to national owner-
ship after 2008?
The renationalization of finance in the EU after 2008—by which we mean
the tendency of finance to retreat behind national borders (Jones 2015)—had
the chance to decline in importance. But has it, and why or why not? This book
identifies two countries hit hard by the Eurozone crisis (EZC) of 2010–2016,
both within the single currency’s southern periphery, that had different trajecto-
ries in response. Spain encountered a fast, deep crisis, and secured international
support for rebuilding its banking sector, while Italy experienced a slower, but
more punishing decline in banking that was more inward-looking and unable to
secure international investment as part of the recovery plans. Are the two cases
as different as they seem? And why is that so? Should we expect the same results
in the context of the Great Lockdown (2020–2022)? This book compares the
DOI: 10.4324/9781003334583-1
2 Economic nationalism and Banking Union
combination of bank activity, central bank oversight, regulation and restructur-
ing of the banking sector and finance ministry interventions through public
support, state aid, restructuring and bank resolution in two Southern European
countries hit hard by both crises to identify common trends, differences, as
causes. We work from the premise that there must be different mechanisms at
work in these two countries, both in the banking sector itself and within the
institutions of the state, that account for the differences between them. We search
for lessons that can be learned for policy makers and analysts alike.
The challenges investigated here take place alongside the ongoing construc-
tion of Banking Union in Europe. Banking Union (BU) was and continues
to be a project to develop EU-level regulation and supervision of Eurozone
banks, as well as the means to close banks in an orderly fashion while preventing
one bank’s failure from setting off a chain reaction through the single market
(Howarth and Quaglia 2016a). It remains an incomplete project, primarily due
to the lack of a European Deposit Insurance Scheme (Schnabel and Véron 2018;
Schoenmaker 2018; Howarth and Quaglia 2018, 2021), and a complex one in
which new European institutions and national authorities must work together to
achieve resilience of the EU’s financial system.
As a project, BU does not explicitly raise the nationalism question by demand-
ing that international investors become partners in EU banks, but it does require
banks generally to increase their capital reserves by attracting investment, which
can be difficult if prospective investors are only sought within the national econ-
omy. This is doubly so in national markets where access to financial markets is
fragile or tenuous, and where other national investors that might invest to assume
ownership of a failing bank are themselves in a precarious position. Public policy
in the form of state aid and supervisory forbearance, as well as corporate govern-
ance structures that hinder or deter foreign investors by protecting bank insiders,
is therefore still possible. As we look for evidence of economic nationalism, our
definition encompasses not only measures that are explicitly geared to exclude
investors from other countries, but features of the country’s variety of financial
capitalism that preserve insider control of the bank, and links to local stakehold-
ers like prominent families, city councils and other banks that outside investors
find unattractive (Goyer and Valdivielso Del Real 2014). Given that investors are
interested in return on investment and that they pay attention to corporate strat-
egy, governance and investment portfolios, their willingness to invest in banks
that are in financial difficulty depends on the likelihood of instigating changes to
these factors. In this context, the difficulty of replacing bank management will
have (inadvertently) nationalist effects.
The same potential support for economic nationalism is true for other con-
nections and contracts that make it difficult to bring the bank back to financial
sustainability. These are above all contracts with creditors that may have to be
broken so that the bank’s debts are reduced to a sustainable level moving forward.
Both situations may be generated where failing banks have strong connections
to city, regional and national governments, enterprises, community associations,
Economic nationalism and Banking Union 3
foundations unions and retail customers that place expectations on them beyond
profitability. In such cases, the roots of effective economic nationalism can be
found in the everyday desire to protect and promote local communities, rather
than outright nationalism per se. This is not an identification and promotion
of large banks as national champions as economic nationalism typically focuses
on (Epstein 2014), but rather the protection of smaller, regional banks as local
champions. Where national institutions and governments are unable to square
the demands of Banking Union with this local protection, we expect functional
economic nationalism to follow communities, as governments protect the inter-
ests of their own citizens, rather than accept application of EU law. In this book,
we suggest that Spain has had an easier time of squaring the circle than Italy, and
has therefore been driven to defy EU law more strongly. We explore the reasons
why it is found in institutional, political and socio-economic (variety of financial
capitalism) characteristics.
Banking Union dates back to 2014, when the European Central Bank (ECB)
began its duties as the direct supervisor for 128 systemically important banks. It
took over this task from national authorities, which had been working collec-
tively within the European Banking Authority since 2011, but had failed to catch
significant shortfalls in a number of banks (Steffen 2014). The purpose was to
increase the certainty that the banks were being investigated regularly and thor-
oughly and, among other things, made to increase their capital to compensate
for a variety of weaknesses that plagued European banking since the onset of the
Great Financial Crisis in 2008 (Wymeersch 2014). The most pressing of these
weaknesses was that of non-performing loans (NPLs), which increased steadily in
Europe as economic growth stagnated, and loans made to businesses and house-
holds fell increasingly into arrears (De Rynck 2016). Banks were expected to
deal with this problem themselves by raising capital and writing off assets. These
were unpopular for the banks, of course, and in some cases, their foot-dragging
was tolerated by national supervisors who expected that once the economy even-
tually rebounded, the problem of NPLs would go away. Notable is that in 2014,
the ECB undertook an Asset Quality Review of systemically important banks
twice, before formally assuming responsibility from its national counterparts in
November. Both in the spring and in the fall, half of all European banks which
possessed insufficient capital were Italian (though the banks that had failed by the
greatest margins were Greek and Cypriot), and only one was Spanish. This raises
questions about both the banks and the bank supervisor, the Bank of Italy, as well
as about the Bank of Spain as supervisor for the Spanish system.
The ongoing weakness of economic growth and employment in Europe after
2008, coupled with an even more pronounced downturn in Southern Europe,
meant that European banks and the governments that had stepped in to salvage
them from the wreckage of the financial crisis were still exposed to the possibil-
ity of bankruptcy. This in turn increased demands for mechanisms to ensure that
this would not happen. To this end, European governments agreed in 2014 to
the establishment of a Single Resolution Mechanism (SRM) that entered force