Author: Bernhard Speyer (+49) 69 910-31735
December 21, 2012
Shortly before Christmas, the EU finance ministers and heads of state and government agreed upon a compromise on the establishment of an EU banking union. In doing so, they managed to meet their self-imposed year-end deadline. Unfortunately, this came at the price of a useless compromise that lacks conceptual consistency.
This is not to deny that the agreement, in principle, to transfer at least parts of financial supervision to the supra-national level is a historic step. But the compromise EU governments now agreed upon is an inconsistent design which will do little to make the EU’s financial system more stable and better integrated. This is all the more deplorable as banking union, in theory, could have been the Union’s best choice to preserve financial stability and market integration in the face of the challenges brought about by the crisis.
Specifically, there are five weak points in the agreement.
First, the scope of EU-level supervision: EU-level supervision by the ECB will be limited to banks in participating member states that (i) have more than EUR 30 bn in total assets; or (ii) total assets in excess of 20% of their home country’s GDP; or (iii) are amongst the three largest banks in their respective country, or (iv) are identified by the ECB as justifying EU-level supervision. This is a major design flaw, as the ECB will constantly have to bicker with national authorities on who is responsible.
Second, the whole edifice of banking union suffers from the fundamental design flaw that EU member states agreed to set up EU-level banking supervision, but failed to make meaningful progress on supra-national instruments for crisis management. Admittedly, EU leaders apparently endorsed a supra-national restructuring regime including a bank resolution fund, to be financed by the banks themselves. However, effective banking supervision requires a fully-fledged crisis management framework, incl. fiscal backstops. Many EU members, including Germany, apparently did not want to confront their electorates with that truth. This will not only render future banking supervisory arrangements incomplete; it also shows a lack of understanding of one of the major rationales for banking union: breaking the sovereign-bank nexus inevitably requires the possibility of cross-border transfers.
Third, Germany also hails as a success the compromise for the decision-taking process, allegedly clearly separating the ECB’s monetary and supervisory functions, thus preserving the ECB’s independence. In fact, however, the arrangement found is a recipe for diffuse responsibilities, where decision-taking will be delayed and lost between Supervisory Council, ECB Council and the arbitration panel.
Fourthly, by agreeing to establish a double majority requirement for decision-making in the EBA, EU leaders destined the EBA to become a paralysed institution, because member states not participating in banking union, chiefly the UK, will enjoy a disproportionate amount of influence and will be in a position to veto any agreement. The chances for the EBA to really establish a single rule book – which is a pre-requisite for effective supra-national – supervision are slim.
Finally and related to the last point, EU leaders failed to clarify upon which legal basis EU-level day-to-day banking supervision will be executed: EU-level supervision pre-supposes a single rule book – which does not exist! Thus, to the extent that the national transposition of the capital requirements directive continues to differ, the ECB will have to apply different laws for the supervision of banks under its purview.
In short: EU leaders first promised speedy establishment of a banking union, then a diligent design of banking union. In the end, they delivered neither. If this is the deal, then better none than this one. One can only hope that the European Parliament in the course of the legislative process will instill greater consistency into the final design.
Author: Bernhard Speyer (+49) 69 910-31735
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