European Commission proposals for a banking union that gives the European Central Bank (ECB) supervision of all eurozone banks were tabled in Strasbourg yesterday (12 September), as a first step towards closer economic and monetary union within the single currency zone.
The reforms, demanded by EU heads of state at their June summit meeting, aim to break the link between banks and governments, preventing heavily indebted countries being sucked further into difficulty by distressed lenders.
The proposals presented by EU Internal Market Commissioner Michel Barnier consist of an EU Council regulation giving the Frankfurt-based ECB unprecedented powers, which will require unanimous agreement of all EU member states.
A second proposal for a regulation to modify the role of the London-based European Banking Authority (EBA) will be subject to co-decision procedure, requiring the European Parliament's consent.
Proposals are controversial
Under the terms of the proposal, the ECB would head the currently fragmented system of national regulators, with the power to police, penalise and even close banks across the eurozone.
The ECB would also gain powers to monitor banks' liquidity closely and require them to keep more capital to protect themselves against future losses.
The proposals are controversial. Germany, though it will be a key member, is concerned that the new supervision will cover all banks including its state banks, or Landesbanken, which enjoy privileged relationships with political administrators in the EU’s largest economy.
London is also worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city's position as Europe's de-facto financial capital. Similar concerns are shared by Sweden and Denmark.
Meanwhile non-eurozone countries pledged to join the single currency share the objective of protecting their banking industries from any knock-on effects that arise from a large – and well-guaranteed – banking sector on its doorstep, hosting many parent banks with branches and investments held in their territories.
Quick agreement may elude negotiators
These countries also want to ensure that if they join the supervisory mechanism before adopting the euro, any requirements to comply with rules are balanced with rights to see the new super-regulator’s proposals, and voice opinions on these.
The Commission aims to achieve swift agreement to the measures, in the hope that the ECB can be installed in its new role by the beginning of 2013, and begin monitoring half of the eurozone banking sector from the middle of 2013.
Reaching agreement on the terms of the union could be complicated, however, delaying the introduction of the new regime beyond the target set by eurozone leaders. As EurActiv reported, non-eurozone member states have indicated that the EBA regulation could become the focus of delay in the European Parliament.
Proposals to establish a fund to close troubled banks and a fully fledged scheme to protect citizens' deposits across the eurozone will follow.
Describing the plans as “a major step” that “will restore confidence in the supervision of all banks in the euro area”, Commission President José Manuel Barroso said: “We should make it a top priority to get the European supervisor in place by the start of next year. This will also pave the way for any decisions to use European backstops to recapitalise banks.”
German Finance Minister Wolfgang Schäuble has lambasted the idea of giving the ECB powers to monitor all eurozone banks, saying it should instead focus only on systemically important institutions.
"The ECB has itself said it does not have the potential to supervise the European Union's 6,000 banks in the foreseeable future," Schäuble told German radio, expressing scepticism about the timeframe envisaged in the Commission proposals.
“The idea is not that out of Frankfurt we are going to supervise the 6,000 European banks directly out of Frankfurt, and [Wolfgang] Schäuble is right, we will need the national supervisors to assist,” Internal Market Commissioner Michel Barnier told reporters in Strasbourg.
“There are concerns and fears in Germany … but we need to proceed step by step and all of this should be properly understood by Germany and they are entitled to ask questions and Germany, and France must make sure that we understand the importance of this debate. Germany is the main contributor [to the eurozone] but we have to make sure this is balanced and everyone does their own job,” Barnier said.
Challenged on the ability of the City of London to retain its position in the new landscape, Barnier said: “I think and I hope that London’s place [within the financial markets] will remain pre-eminent. It is not just for the UK, but for the whole of Europe, and it will retain that position all the more if the euro works well. The City’s interests are for the eurozone to escape the crisis, for the euro to be strong, and what we are suggesting is in the interests of the City.”
“The European Banking Federation (EBF) will continue to constructively engage with EU policymakers towards the finalisation of the additional European legislative proposals” said EBF chief executive Guido Ravoet.“It is however clear that the whole project of banking and fiscal union will require a greater degree of commitment among member states than the proposed measures foresee for the time being.”
“We pay tribute to the substantial progress made since late June by colleagues in the EU institutions on designing the first pillar of a single supervisory mechanism,” added Ravoet. “It signals a significant u-turn from national reflexes back to European solutions. The EBF stands ready to work with policy makers wherever possible, in a bid to restore growth and financial stability.”
The UK-based British Bankers’ Association was more circumspect, however. “The single market is Europe's biggest asset,” according to its chief executive, Anthony Browne. “Any splintering into a two-tier financial services market would threaten the ability of businesses across Europe to raise money for investment and would hamper economic recovery,” Browne said.
Wilfried Martens, the president of the European People's Party (EPP) – the largest political group in the European Parliament – pledged to be constructive in the negotiation process for a banking union.
“The EPP is committed to playing an active role in this process and we will make a tangible contribution next month, at our Congress in Bucharest, in the framework of our renewed political platform,” Martens underlined.
“In putting a robust system in place to enhance the stability of the eurozone banking sector we must not lose sight of the need to continue to develop the EU single market for financial services, to deliver existing aspects of the reform agenda and to nurture global convergence around high regulatory standards,” said Michael Collins, the chairman of the American Chamber of Commerce to the European Union’s financial services and company law committee.
“The creation of this new regime provides a real opportunity to deliver on all of these objectives,” he added.
While welcoming the proposal as one of the indispensable building blocks of the structural solution to tackle the eurozone crisis, Alliance of Liberals and Democrats for Europe (ALDE) group president Guy Verhofstadt said: “It is hard to understand why the banking union proposal is based on the intergovernmental method. This is a recipe to create a pan-European supervision system with one arm tied behind its back.”
The proposal raised several doubts, Verhofstadt said: “For instance, it opens a possible conflict of interest between the ECB's role as guardian of price stability and its new supervisory tasks, between the ECB and the European Banking Authority, between the supervision of eurozone and non-eurozone banks.”
French MEP Sylvie Goulard, ALDE coordinator in the European Parliament's economic and monetary affairs committee (ECON), commented: “As spelled out in June European Council conclusions, the banking union is one of the building blocks 'towards a Genuine Economic and Monetary Union' together with strengthened democratic legitimacy and accountability. The exclusion of the Parliament from the legislative procedure undermines this latter goal.”
Another MEP pointing to the democratic issues was Sharon Bowles (ALDE; UK) the chair of the ECON committee said: “This proposal leaves many question marks. There is for example a lack of democratic legitimacy due the exclusion of the Parliament as full co-legislator and the democratic control of the proposed supervision authority is questionable as it is built within the system of the ECB whose independence cannot be violated.”
The European United Left/Nordic Green party also had concerns about democracy. "You set out your vision of a closer European Union, a banking and political union, a democratic federation of nation states, but if we want a future for Europe, we have to ask the people what they think of this future model," said chair Gabi Zimmer (GUE/NGL, Germany) responding to Commission.
“This will lead to an unprecedented concentration of powers at the ECB which is worrying especially because the ECB is already one of the most powerful and least accountable central banks," according to Sony Kapoor, an expert with economics think tank Re-Define.
Kapoor also addressed the non-eurozone issue, saying: “The somewhat awkward configuration on voting arrangements at the EBA between Euro area and non Euro area member states seems to be a recipe for potential problems though it is hard to see how else the Commission could have reconciled a Banking Union for the Euro area with a single EU-wide market in financial services.”
EU leaders decided at a June summit to create a common banking supervisor as part of a deal that would allow the bloc’s rescue funds to directly lend funds to stricken banks instead of passing aid through countries and adding to sovereign debt problems.
It is a first step towards a banking union and part of wider moves towards fuller economic and political integration which they judged necessary to break the vicious circle driven by the eurozone debt crisis which has brought the region’s economy to a standstill.
- 13-14 Dec.: EU leaders could adopt the plan at the formal December summit meeting.
- Jan. 2013: If the rules are adopted, the European banking supervisor could start operation.
- Regulation giving strong powers for the supervision of all banks in the euro area to the ECB
- A regulation to ensure a balance in decision making structures between the European Banking Authority (EBA) euro area and non-euro area Member States.
- Communication from the Commission to the Parliament and the Council: a Roadmap towards Banking Union
- Commission proposes new ECB powers for banking supervision as part of a banking union: Press release
- Commission proposes a package for banking supervision in the Eurozone – frequently asked questions
EU financial institutions
- Il Sole 24 Ore: leaked draft of banking union proposal
- The New York Times: Super Mario to the rescue Op-ed by Roger Cohen
- TABB Forum: Interview with Kay Swinburn
- EurActiv Czech Republic: Komise chce výrazné pravomoci pro ECB, ukázal návrh