Thursday, December 19, 2013

The Euro Zone Banking Policy

The GLOBAL Banking system is about to take new changes in its business strategies and handling bailouts and non-performing assets. Indian economy might be the late comers in the banking revolution but Euro zone economy has already taken the oath of making the revolution. 2014 would be marked as the year of banking regulation change year since US, Europe and Asia would be making new progressive strategies taking risk management and control new levels disposing off the great recession polices.

Euro-zone has already taken the act of policy change. The 17 euro zone states are involved and the UK and 10 other non-euro zone economies are not part of the deal.  Under the plan a 55bn-euro ($75bn; £46bn) fund would be set up, financed by the banking industry, over 10 years. The proposed banking union consists of three parts or the so-called three pillars. According to an EU proposal, the ECB will “have direct oversight of euro zone banks. At the same time it will also intervene if any of the banks gets into trouble.

The second part is the Single Resolution Mechanism. This means that if a bank anywhere in the Euro-zone gets into trouble, the process of bailing it out - or even letting it go bust - would be managed by a common resolution authority and no new body needs to form. This reduces the time gap and will provide instant relief if there is any adverse situation.

The third and the last part is proposed unions involves a common deposit guarantee, which means that anyone with an ordinary bank account anywhere in the Euro zone would have their money - up to a limit of 100,000 Euros, guaranteed by a common Euro-zone fund. The prime aim is to have a common rulebook covering bank accounts across the EU and eventually a joint fund to compensate for losses when a bank gets into trouble.
The prime motive behind creation of this single policy is that 17 euro states are joining hands to find the GDP growth within the economies and also to strengthen the banking system over the next decade. Over the main years of the crisis, European governments spent 1.5 trillion Euros propping up the banks.  This will also save the tax payers money and would not let austerity measures to get implemented which acts as pull backer for the GDP growth.


Well Indian Banking system needs strategies and fund to manage the rising NPA which is an significant threat for the Indian economy. Increasing the rate of interest is not an policy weapon to attract more deposits is now being proven. Banks might be able to garner more deposits but high cost of debt would increase the NPA which will automatically increase the debt burden of the Indian corporate and Banks too. We will have to wait to see some revolution to come from RBI’s end.

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