Europe’s banking union: the market responds

Author: | Published: 13 Dec 2012
Email a friend

Please enter a maximum of 5 recipients. Use ; to separate more than one email address.

After four months of fraught diplomacy, Europe’s finance ministers this week agreed to hand the European Central Bank (ECB) powers to directly supervise the region’s biggest banks. Here EU lawyers assess the deal terms and outline the key questions remaining.

The deal, brokered in the early hours of Thursday morning, marks the most concerted financial integration project since the creation of the single currency and thereby the first big step towards a European banking union.

It will see the ECB begin direct supervision from early 2014 of European banks with assets of €30 billion or with balance sheets that represent at least 20 % of a member state’s economic output. This amounts to around 200 eurozone lenders and an average of at least three banks in each member state.

Mayer Brown’s Alexandria Carr said it remained to be seen whether the compromise was sufficiently credible, legally robust and effective enough to establish a system of common supervision of banks and ultimately common fiscal responsibility for the banks within the single supervisory mechanism.

The agreement links to a number of key questions surrounding the future of the eurozone, including whether Europe’s permanent bailout fund, the European Stability Mechanism, can directly recapitalise banks. It could also have important implications for the UK, given the threat of eurozone caucusing - the 17 writing the rules for the 27 - in the European Banking Authority (EBA) and changes to EU financial regulation.

Morrison & Foerster's Peter Green said the proposals were the beginning of a process of much more centralised and coordinated bank supervision within the Eurozone which is likely to be critical to the continued future of the Euro in its current form.  

“The proposals represent an important step towards pan European regulation of financial institutions within the Eurozone by the ECB," he said.

Bank oversight

Of the questions which remain unanswered, the implications of the agreed-upon dual supervisory regime topped Carr’s list.

“The ECB seems to be saying that it will have oversight of all banks,” she said. “This raises questions of who is responsible and accountable and whether this is truly common supervision in the sense of a harmonised approach to all banks.”

“Will this be enough to lead to common fiscal backstops? That will be the more difficult debate,” she said.

“Without such further agreement, questions may be asked as to what the ultimate point of this agreement is and whether it can, as was initially hoped, provide some stabilisation to the eurozone,” Carr added.

Hendrik Haag of Hengeler Mueller disagreed. “The ECB supervising more than 6,000 EU banks, 2,000 alone in Germany, would have created a bureaucratic monster and might have frustrated the whole idea," he said. "In Germany, the number of banks supervised by the ECB is now down to around 35, still a significant number compared to only one global SIFI in Germany.”

Safeguards for non-eurozone countries

According to the terms, the non-eurozone countries outside the banking union will be able to check the power of the ECB and maintain some influence over technical standards applying to all EU banks via a so-called double simple majority within qualified majority voting.

This means technical rules at the EBA will - as before - need to be approved under qualified majority voting. Additionally, within this vote, there must be a simple majority of ‘ins’ and a majority of ‘outs’.

The UK, Sweden and the Czech Republic have said they definitely will not join the single supervisor. The UK can therefore block any regulations that it does not support, along with other ‘outs’.

Remaining concerns

In a statement released today, the independent thinktank OpenEurope warned European rules will need to be reviewed if the number of 'outs' gets below 4 and could be completely rewritten. What’s more, if all remaining countries decide to join, then these rules could need to be changed almost immediately.

The thinktank also voiced its concern that the EBA regulation is decided by qualified majority voting and the ECB regulation by unanimity. “Once the UK has agreed to the ECB regulation, it loses much of its leverage,” the statement read.

Barney Reynolds, Shearman & Sterling’s London-based financial institutions advisory and financial regulatory group head, said the status of UK supervisors was a key concern.

“Key will be whether the UK supervisors are of equal status to the ECB within the EU as a whole or whether, as per the Commission’s draft, the ECB is operating with some sort of pan-EU mandate and remit, which would place it effectively above the UK regulators and undermine the long-term viability of being a permanent out,” he said.

How robust the mechanisms are by which the ‘outs’ can ensure they’re not steamrollered into accepting dictats from the ‘ins’ at EBA level was another concern, Reynolds said.

Clifford Chance’s Peter Scherer warned the timing for establishing the single supervisory mechanism remained challenging. The deal terms stipulate the deadline as March 1 2014 or 12 months after the entry into force of the legislation, whichever is later, subject to operational agreements.

Scherer said this was at least significantly more realistic than the original timeline of early 2013. However, the single supervisory mechanism is only the first of at least three steps towards a European banking union and political compromises will now also have to be found with regard to the future European bank restructuring procedures and rules and, probably most challenging, the future European deposit protection rules.

But Scherer remained optimistic. “The agreement on the single supervisory mechanism is very encouraging and makes these next steps look more realistic,” he said.

Tearsheet – the key terms

The single supervisory mechanism will consist of the ECB as Europe's future main banking supervisory authority as well as of the national competent authorities.

The ECB will be directly in charge of the supervision of banks with a balance sheet above €30 billion and with intervention rights regarding the supervision of the smaller institutions, including the large groups of German savings and cooperative banks, by the competent national supervisors.

National supervisors will also remain in charge of consumer protection, money laundering, payment services and third country branches.

In order to avoid conflicts of interest between the ECB's monetary policy and its prudential supervision, these tasks will be strictly separated and a supervisory board in charge of the supervision tasks will be set up within the ECB.

Non-Euro zone countries will be able to participate in the single supervisory mechanism and will then be represented, with full and equal voting rights, on the said supervisory board.

The EBA will retain its competences for further rule-making - the so-called single rulebook - and for ensuring respective convergence and consistency in supervisory practice.

See also

Banking sector reform: a definitive guide to the latest developments

IFLR's coverage of regulatory changes to US, UK and EU bank structures features in-depth analysis and expert opinion on the reforms' legal and systemic implications

How to split up the euro

2013 will be crunch time for the eurozone, lawyers have warned

EXPERT OPINION: why an EU banking union poses an existential threat to the UK

Mark Field, MP for the Cities of London & Westminster, believes a successful banking and fiscal union represents an almighty challenge to the UK