Searching for common ground on a European banking union | FT Alphaville

Searching for common ground on a European banking union

With the EC set to outline its proposals for a European banking union in less than a month’s time, leaked documents detailing the initial discussions indicate differences of opinion remain as wide as ever.

A key area of contention seems to be delegation of banking oversight tasks. From Bloomberg (our emphasis):

The ECB should have a core set of central powers to oversee all banks in the 17-nation currency bloc while delegating some tasks to individual countries, under one option favored by the U.K. and European Union economic policy officials. The ECB supports a similar “light touch” approach that would leave day-to-day supervision for most banks in the hands of national authorities, the documents show.

Another approach, backed by officials working on EU financial rules, would require the ECB to take major oversight decisions for all banks, the papers show. Officials opposed to this approach say it could compromise the central bank’s reputation and perceived independence, according to the documents, which include EU-level and U.K.-based analysis of the policy debate.

“Light touch” versus “major oversight”? That’s quite a gulf and no sign of a bridge.

But at least there seems to be agreement that the ECB would “directly supervise” banks that have actually been bailed-out:

The ECB could become the day-to-day supervisor for euro- area banks considered systemically significant worldwide or within Europe, as well as for lenders that tap euro-zone rescue funds, according to the documents. The papers show that the central bank agrees that it should directly supervise institutions receiving EU bailouts and could delegate daily supervision of small banks to national regulators. The central bank would be able to override decisions taken by local authorities, according to the proposals.

And the UK wants to see other banks move to the new regime over the next three years (unless they need to be bailed out sooner) according to the docs.

Then there is the question of accountability. All policymakers are agreed that the ECB will have to be publicly accountable for its bank-supervision decisions. But the Commission also wants to give the European Parliament a say, whereas London prefers some kind of oversight role for national parliaments.

Checks and balances will need to go in multiple directions:

These calls for accountability must be balanced by measures to preserve the ECB’s independence as central bank and monetary- policy setter, according to the documents. As the banking-union plan takes shape, EU lawyers are examining how to make sure the ECB does not have an unfair advantage over other regulators because of its autonomy, the documents show. The central bank will need to remain insulated from political interference as it takes on its new powers.

There’s also a Dutch/British clash, regarding who these new rules should cover and how the costs of the bank bailouts are shared. Unsurprisingly, the UK wants just be the 17 euro nations to be affected. The Dutch disagree, and have also called on the new bank supervisor to “carry out stress tests and for investors to take losses before accessing capital from the euro rescue fund”.

Perhaps even more difficult is the question of how countries not part of the euro will fit in:

There’s also debate on whether non-euro nations will be able to participate in board meetings of the new single supervisor and related joint activities. If non-euro members are allowed as observers, the U.K. would like all EU nations to be included, while the European Commission favors granting access only to countries that have committed to join the common currency eventually, the documents say.

Coming less than a month before the Commission is expected to present its proposals on September 11, these documents are unlikely to soothe markets.

From a friendly trader, despairing at the lack of agreement:

In a taste of the obstacles ahead, a leaked report on the initial discussions shows significant differences of opinion. Does it cover Banks in the EU27 or EZ17? Is it a “light touch” ECB sharing powers and responsibilities with national Regulators, or an all powerful ECB? And then what is the oversight set-up for such an ECB? Does the ECB cover ALL EZ banks? or just the “systemically important”, or even just the “rescued” ones….?

It’s still unclear what level of detail the EC’s proposals might contain. Mario Draghi didn’t give away too much when he addressed the EU parliament last month:

“We should expect from the commission a strong proposal, a strong proposal that would put the ECB in a position to carry out its duty with effectiveness, rigor, independence and without risk to its reputation.”

But we should at least get some kind of feel for the scope of ECB involvement and how its relationship with the European Banking Authority might work. Still, Mariano Rajoy’s hopes for a banking union to be approved at the December EU summit are likely to prove over-optimistic.

With the Dutch elections and the German constitutional court decision on ESM both due on September 12, expect bumpy week markets.

Related links:
Banking union is a priority, says IMF – FT
On-site supervisors a good start for ECB
– FT