EU split over banking union decentralisation

Author: Danielle Myles | Published: 25 Sep 2012
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German support for an EU banking union has increased after last week’s comments by European Commissioner Michel Barnier clarified that national regulators will continue to have a role.

It’s an encouraging sign for the European Commission’s (EC) troubled proposal, as its most ardent opposition has come from Germany. Non-eurozone member states, however, are not as convinced.

Speaking in Berlin on Thursday, the EU internal market chief confirmed that the banking union’s single supervision mechanism would be supported by the network of EU national supervisors.

“I think [his comments] helped ease concerns,” said Peter Scherer, a Frankfurt-based partner with Clifford Chance. “His statement made clear that the existence of a European supervisory authority will make things easier and clearer, but it won’t abolish the national supervisors.”

Barnier also said it is clear that the European Central Bank (ECB) is not in a position to centrally supervise all 6,000 banks, which is why the network of national supervisors will offer support.

The single supervisory system will define the modalities of decentralisation, but it is likely that the ECB will, at a minimum, supervise financial institutions deemed systemically important and those benefitting from public funding.

Until last Thursday, the only formal sources of information on the banking union plan were the September 12 proposaland Barnier’saccompanying speech. As these provided relatively abstract details on the plan, Scherer thought some form of decentralisation was possible.

But he said Barnier’s statements on Thursday were a relief, and that some other market participants thought national supervisory authorities could effectively lose their powers

Eight days lapsed between the proposal’s release and Barnier quelling these concerns.

However an EC spokesperson told IFLR that while these points were not stated at the September 12 press conference, the Thursday comments contained ‘nothing new’, and they were simply an opportunity to clarify those points.

Not convinced

Following his latest comments, Barnier reportedly sees no German resistance to the supervisory scheme. But the same cannot be said for other member states.

While the Thursday clarification was helpful, it is just the start of the conversation.

Morrison & Foerster partner Peter Green in London said it was likely that there will continue to be some lack of clarity over the respective ambits of the ECB and national authorities.

“Particularly in a crisis situation; national authorities would be keen to keep control over the resolution of banks in their jurisdiction,” he said. “It is inevitable there will remain potential for tensions between authorities and the ECB in these circumstances.”

For many peripheral member states, Barnier’s promise to delineate the ECB’s central supervision and national regulators’ conduct supervision has provided little comfort.

One Sofia-based partner said the ECB was obviously not in a position to supervise 6,000 banks. “It will heavily rely on the national regulators, but the ECB will more or less be the executive of its decisions,” the partner said. “It seems the national authorities won’t have the authority to make decisions, rather they will implement the decisions of ECB.”

Bulgaria’s central bank governor has spoken out against the banking union proposal. Relinquishing economic oversight and sovereignty is his prime concern; particularly when the average capital ration of the country’s banks is around 17%, and the national regulator is a part of the central bank.

“But these are not just the concerns of the Bulgarian central bank but of many other small countries as well,” said the Sofia-based partner. It’s expected to be particularly problematic in times of crisis and when the national authority disagrees with the ECB.

What’s also generated pushback is the fact governments are being asked to approve the plan before knowing the full details.

In addition to the single supervisor, the banking union entails an EU-wide resolution scheme (the legislation for which is underway) and a single deposit insurance system. Neither of these will be finalised before countries’ decision deadline.

This makes it difficult to make an affirmative decision, the Sofia partner said.

Overambitious timing, again

Along with decentralisation, the other immediate concern is the timeframe for implementation. This came to a head on Saturday, whenGerman Chancellor Angela Merkel and French President Hollande clashed over the timeline.

It is proposed that the ECB begins supervising banks under the European stability mechanism in January 2013; systemically important financial institutions in July 2013; and all other banks by January 2014.

Green believed the timing proposed was highly ambitious. “It would be very surprising to see anything firmly developed before the end of the year,” he said.

“Even the January 2014 deadline seems ambitious,” he added. “The ECB obviously has to get personnel and systems in place by then – that happening in just over a year is difficult to see.”

The EC spokersperson noted that it is usual practice for the ECB or EBA to bring in expertise from the national authorities, and that the ECB is expected to be able to recruit sufficient competent staff, especially because of the phasing-in approach.

Green noted that there is an impetus to get this done more quickly than has been seen in the past because of the pressure on the Eurozone economy and possibility of future bailouts. But it’s not the first time an EU regulatory body has been set up at a questionable pace.

Scherer said when looking at the EBA's (European Banking Authority) early stress-testing, many in the markets thought that they went too fast.

The staggered timeline is to establish the single regulator, but the next two stages – establishment of a single resolution authority and deposit insurance scheme – are tipped to be even more problematic.

For instance, Germany’s finance minister has already called for EU-wide stress tests, long-before taxpayers’ money can be used to rescue a non-German ailing bank.

An important distinction between this and most other EU regulatory plans is that the market’s biggest players are in favour of the changes. For them, a single regulator applying a unified set of rules is a clear benefit.

“My feeling is that internationally active banks are overwhelmingly in support of such a development, and think it is going in the right direction,” Scherer added.

The ECB and Bulgaria’s central bank did not return requests for comment.

See also

‘Spanish debt crisis’ impact on EU resolution and banking union proposals’

'Why EU banks need limited liability'

‘Liikanen poll: 75% Volcker/Vickers hybrid wrong for Europe’s banks’