After four months of fraught diplomacy, Europes
finance ministers this week agreed to hand the European Central
Bank (ECB) powers to directly supervise the regions
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
states economic output. This amounts to around 200
eurozone lenders and an average of at least three banks in each
Mayer Browns 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
The agreement links to a number of key questions surrounding
the future of the eurozone, including whether Europes
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
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.
proposals represent an important step towards pan European
regulation of financial institutions within the Eurozone by the
ECB," he said.
Of the questions which remain unanswered, the implications
of the agreed-upon dual supervisory regime topped Carrs
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
Will this be enough to lead to common fiscal
backstops? That will be the more difficult debate, she
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
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.
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.
Whats more, if all remaining countries decide to join,
then these rules could need to be changed almost
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
Barney Reynolds, Shearman & Sterlings 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 Commissions 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 theyre not steamrollered into accepting
dictats from the ins at EBA level was another
concern, Reynolds said.
Clifford Chances 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
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
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
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
The EBA will retain its competences for further
rule-making - the so-called single rulebook - and for ensuring
respective convergence and consistency in supervisory
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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