Banking Union Part II – now for the safeguards

Here’s the continuation of the EU banking union saga – the document (also leaked, see here) that sets out how the single market and banking union are meant to fit together. A crucial point for the UK and others. As we noted on Friday, the Commission was set to table a series of documents establishing the first step towards a banking union. Well, there will be three of them, to be precise:

• A regulation to make the ECB the supervisor for “all” banks in the Eurozone, with non-euro countries able to join if they wish. This is the one we looked at – and published – on Friday.  

• A regulation making adjustments to the European Banking Authority in light of the new powers of the ECB, with the objective to avoid the banking union fragmenting the single market. This is the one that we look at below. 

• A “communication” which sets out the Commission’s vision of the banking union long-term, including a deposit guarantee scheme and a single resolution fund (also known as wishful thinking, at least for now).

Following our analysis of the first document, here are our thoughts on the adjustment to the EBA’s rules and whether the ‘safeguards’ proposed by the Commission will address the risk of the Eurozone/ECB/banking union encroaching on single market territory or the 17 outvoting the non-euro 10 on financial regulation in particular (i.e. Eurozone caucusing at the EBA).

The EBA will have powers over roughly the same areas as before and the same voting weight too, and will continue to serve as the bank supervisor-cum-regulator for the EU-27 (which was already a quite confusing arrangement). However, the EBA may, in a round-about way, actually gain powers vis-a-vis the UK (which we'll return to). To avoid the ECB over-ruling or undercutting it on matters of the single market, the following safeguards have been proposed:

• Interestingly, when within its remit, the EBA would be able to circumvent the ECB in an “emergency situation” and impose a decision directly applicable to an individual bank or financial institution. In such cases, therefore, the ECB would be ‘junior’ to the EBA – much like national authorities. 

• A new “independent panel” of experts could be created by the EBA to judge on breaches of EU law i.e. when a country breaks single market rules or when two “competent authorities” (of which the ECB could presumably be one) disagree on whether rules have been breached. The panel’s decision could be over-turned by a simple majority at the EBA’s supervisory board, which needs to include at least three votes from non-euro members (if they have not opted into the banking union) and three votes from euro-members. This is an interesting one, and we need more details to make a clear assessment as to what this would mean in practice – or how effective it’ll be. Who will the independent experts be (drawn from the EBA itself)? How will they be appointed? Will it always be ad hoc or more permanent? And will this, in effect, make the EBA more powerful at the expense of UK authorities (this will be a tricky one, stay put)?

• Decisions on capital requirements for banks is addressed specifically. This is a key concern for the UK government and an area we’ve pointed to consistently where the Eurozone could face a fresh incentive to act as a block under banking union. The proposal suggests that issues relating to capital requirements – over which the EBA has some moderate powers – will be decided by QMV within the Board of Supervisors but can be overturned by a simple majority, again including at least three non-euro states. 

• The management board of the EBA must consist of at least two non-participating member states (out of six).

Marks for creative solutions, and it seems the Commission genuinely wants to preserve, as it puts it, “the proper functioning of the EBA in the interest of the union as a whole.” Part of the UK financial services industry might be reasonably happy that the UK would have a seat at the table, at least in the EBA. But this remains an awkward patchwork, and it probably won't be enough to eliminate British anxiety over the banking union.

And remember, this only addresses the relationship between the EBA and the ECB, which is only one of the many relationships within a banking union that needs to be clarified. As we’ve argued before, the biggest worry remains an incremental, de facto institutional shift from the EU-27 to the Eurozone 17, involving the Commission and the European Parliament as well, which is why we want to see stronger single market safeguards, also at Council-level.

And it ain’t getting any easier to work out who has final accountability over financial supervision in Europe…