EU bank union terms unravelled

Author: Gemma Varriale | Published: 20 Nov 2012
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The circulation last week of compromise terms relating to the establishment of a European banking union marked the latest attempt to break a stalemate in member state discussions on the proposals. But EU lawyers believe such a union will be ineffective without Treaty change

It is hoped an EU banking union, which would cover everything from large systemically important institutions to smaller savings banks, would create a common fiscal backstop to break the links between regional banks and governments.

It would also give the European Central Bank (ECB) ultimate responsibility for supervising some 6000 banks in the region. Some EU member states, such as Germany, remain doutbful the ECB has the capability and capacity to undertake such wide-ranging powers.

Under last week’s compromise terms, the ECB faces curbs on its power as the pan-European banking watchdog of last resort. The text also proposed ways to strengthen the rights of member states.

The terms assessed

One option for discussion was to end the one-member, one-vote principle on the ECB supervision board. This would give greater weight to the vote of member states with a bigger banking sector or population.

It could also build on the qualified majority voting rules set out in EU treaties under which each member state’s vote is calibrated according to the size of its population.

“It is not without precedent, even if it would open up the possibility of voting in line with national interests in an area where a supranational interest is intended to prevail,” said Alexandria Carr of Mayer Brown in London.

Another option is for non-eurozone banking union members to ignore ECB decisions, if the ECB overrules the supervision board’s proposals.

“The idea that the euro-outs could ignore decisions of the ECB yet remain within the banking union seems to undermine the very idea of common supervision in the sense of a harmonised approach to all banks,” said Carr.

The suggestion seems to be an attempt to placate the euro-outs given that legal constraints mean they can’t take part in the ECB decision-making process.

“It also recognises that any subjection by the euro-outs to decisions of the ECB is ultimately voluntary, because the powers of the ECB under the Treaties do not extend to them,” said Carr.

But the proposal would create an asymmetry between eurozone and non-eurozone banks, even if they were both, in theory, within the banking union.

It would also create a real risk of legal uncertainty and confusion as to who is ultimately responsible and accountable for the banks of the euro-outs.

The discussion paper also reportedly proposes new ways to give the UK more voting power at the EBA.

It would mean that the EBA could not agree binding technical standards unless either a simple majority of the euro-outs or at least three of the euro-outs agree.

But it’s still not clear whether this proposal will apply to all voting within the EBA or only to voting on binding technical standards.

Removing the ECB’s responsibility to co-ordinate the policy positions of banking unions members was also tabled for debate.

This proposal would lessen the possibility of eurozone caucusing within the EBA but it is not clear whether the ECB would also have a vote.

If so, Carr explained, the eurozone would have additional voting power and this is unlikely to be accepted by the euro-outs. “On the other hand, it would seem strange if the prudential supervisor of eurozone banks did not have a vote within the EBA,” she said.

The option to give a banking union member the power to tighten its national rules to tackle a lending bubble also met with opposition. This is because it too seems to undermine the idea of common supervision and the ultimate objective of a common fiscal backstop.

It would also create a real risk of legal uncertainty and confusion as to who is ultimately responsible and accountable for the prudential supervision of banks.

Treaty change

Ultimately, the EU is limited in what it can achieve without Treaty change.

If it wishes to develop a credible solution to the crisis in the eurozone, establish a long-term framework for effective supervision which is legally robust and deal with the concerns of member states, it needs to address the fraught question of Treaty change at the same time, said Carr explained.

This explains many of the difficulties that are only now becoming obvious.

See also

Banking sector reform: a definitive guide to the latest developments

Why an EU banking union poses an existential threat to the UK opinion

How to split up the euro