ICFR comments on Commission’s proposals on EU Bank Union

Comments below by Richard Reid, Research Director of the International Centre for Financial Regulation on the European Commission’s “roadmap” towards Banking Union for the euro area, published this morning.  Full ICFR analysis at www.icffr.org.

 “We’ve seen high profile disagreement over the scope of the ECB’s supervisory powers recently, with the Commission arguing for the Single Supervisory Mechanism (SSM) to cover all banks, while Germany’s finance minister says that this would go against “common sense”. The debate has two elements: the first relates to the practicalities of a central supervisor for some 6,000 banks; the second, however, is more political, particularly in relation to Germany, which is reluctant to cede sovereignty over its extensive network of smaller savings banks and cooperative banks.

“There is a short-term and a long-term aspect to the banking union plans which creates a certain tension. The IMF suggested that the supervisory aspects of a union would play a supporting role to the more pressing need to establish common resolution and deposit guarantee schemes, but the difficulty is that the crisis requires something to be done immediately, and the supervisory aspects are perceived as the easiest to deliver politically.

“The other elements will involve a degree of fiscal burden sharing, for which there is far less political support. Whether or not the Commission’s proposals will be sufficient to persuade market participants that the rest of the banking union will happen remains to be seen, and the effectiveness of the bank union as a whole is critically dependent upon these other aspects.

“The proposal to locate the SSM at the ECB (Germany’s preferred option), rather than the EBA in London (the Commission’s preferred option) sets up a potential tussle between the euro area countries and the rest of the EU27. Some EU member states have significant concerns about what a euro area banking union will mean for the broader single market. The Commission has attempted to pre-empt these concerns by proposing measures to amend the governance of the EBA. While the Commission appears adamant that the ECB will not replace the EBA, it is unclear whether the proposed safeguards will convince countries such as the UK, Denmark, and the Czech Republic.

“While the ECB has “ultimate responsibility” for the tasks these proposals give it, it is also unclear how this will work in day-to-day terms. The degree of operational centralisation envisaged by the Commission is not yet clear, with some operational delegation to national authorities seeming inevitable.

 “The schedule to establish the SSM by 1 January 2013, with the ECB taking over its new responsibilities in full by the beginning of 2014, is ambitious, and some member states are  concerned that this will create expectations which cannot be fulfilled. Today’s publication initiates much more difficult negotiations with EU members, many of whom have significant concerns with the proposals. If progress on other regulatory initiatives such as the Capital Requirements Directive and Regulation, Solvency II, or MiFID II, are anything to go by, we would do well to be sceptical of the very tight deadline the Commission has set.

“This proposal is the first step of many on a politically and technically ambitious bout of institution building. The EU will hope that the proposals are sufficient to demonstrate its determination to pursue the more difficult, but absolutely necessary, aspects of a banking union, thus helping to stabilise the situation in the short term, and setting out a more ambitious long-term plan. But today’s proposals by themselves are not a panacea for the problems of the eurozone.  Proposals for a bank union cannot be separated from other crisis response measures. Indeed, the IMF’s exhortation to bank union was accompanied by the familiar call for structural reforms to labour markets, and policy efforts to improve competitiveness between euro area countries, as well as fiscal consolidation.”

 

 

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