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Wednesday, September 19, 2012

Germany and banking union: building the chinese wall

Update 14.15: Reuters has seen an internal document drafted by German MPs from Angela Merkel's ruling coalition - setting out their views on plans for a eurozone banking union. The MPs focus on three main aspects:
  • ECB oversight should be limited to systemically important and cross-border banks;
  • Monetary policy and banking supervision tasks should be clearly separated within the ECB;
  • The document also makes clear that deposit guarantees "will not be unified across Europe". They "may be harmonised, but the responsibility must remain national."  
And here is our original post from this morning: 

Yesterday's Die Welt claimed that Germany is pushing a proposal which would see less powers for the ECB's Governing Council under the Eurozone's banking union. Under the Commission's proposal, the ECB's Governing Council would have the final say over both monetary policy and matters of supervision. This could trigger a series of conflicts of interests as the Governing Council would in effect become the judge, jury and executioner - i.e. it would simultaneously make decisions on bond-buying, bank liquidity provisions and whether banks should be recapitalised or closed down (the latter could trigger losses due to the first two). That incentive structure does not feel right, and the 2009 de Laroisière report for the Commission explicitly warned against it.

The Commission's proposal sees supervision responsibilities being outsourced by the ECB Governing Council to a new  Supervisory Board - consisting of representatives from national authorities - but with the Governing Council still having the final say. In addition, the Chairperson and the Vice-Chairperson of the Supervisory Board would be elected from the members of the Governing Council.

According to Die Welt, during last week's meeting of EU finance ministers in Cyprus, Germany put forward a counter-proposal designed to address these concerns. It involves the creation of a completely independent committee within the ECB consisting of national authorities, where voting weights would mirror the size of each member country's financial markets (and therefore their share of the cost). All of this is unconfirmed, but such an arrangement would take care of two issues:

Firstly, a Chinese Wall would be erected between supervision and monetary policy (at least in theory). 

Secondly, unlike the Commission's proposal which fails to spell out whether non-euro countries joining the single supervisory mechanism (SSM) would get voting rights on the new Supervisory Board (an ambiguity which attracted the wrath of Swedish Finance Minister Anders Borg), this arrangement would make joining far more attractive for the likes of Sweden and Poland.

According to Die Welt, the German proposal would give non-euro members a vote on the supervisory board in return for subjecting their banks to the SSM.  There are a huge number of other issues that non-euro countries will still have to consider, such as the constant risk of being outvoted by a eurozone caucus and no discretion on tailored national regulation, i.e. capital requirements (hello Sweden). It is also unclear how this proposal reads legally (the ECB's statute will have to change anyway, but still).

What's clear is that the Commission's proposal still needs a lot of brushing up.


Rik said...

All fully predictable.
- You need proper oversight to make any bankingsector work.
- You need it relatively quickly for the ESM stuff.
- Effectively only the ECB has the manpower (but still considerably short) to do that. But would need national regulators to do most of the work.

What we get is howver mainly political dogfights.
- Barosso coming with solutions that strengthens mainly the Commission's position.
- Also solution that will never get an ok from the UK (which is required as the treaty should be changed).
- Germany against it as it doesnot want especially its Landesbanks centraly regulated, because of the political influence and the garbage that is still in there.

What we will see is months long horsetrading and ending it with a political compromise that basically will not do the job of proper supervising.

You need a 2 layer structure to make the UK and Sweden go along with it with safeguards for common market for non EZ members.

Within the EZ you need a proper central regulator.

Who will need the local regulators to do the supervision. But with an ECB which can overrule them when necessary, like now in Spain (necessary but not possible).

Anyway doubtful if that will work. ECB has become too politicised. It is now eg pumping up bust banks in the South (for political reasons) not for having a secure bankingsector (as it makes the sector more insecure this way). And with EU institutions having the reputation as they have re enforcing (or better the lack thereof when politically opportune) I am not very hopeful.

christina Speight said...

Rik - Where do you hang out? Haven't you noticed that in respect of your "Also solution that will never get an ok from the UK (which is required as the treaty should be changed)." that Cameron will sign up to anything that is out in front of him if it postpones the day that he has to face the electorate in a general election or a referendum.

Rik said...


Cameron simply like everybody else on this earth can only so long create his own reality. He clearly doesnot like to deal with unpleasant situations. But bad luck, he should not have become PM and certainly not in these challenging times.

The good thing of this crisis for people like yourself is that Cameron cannot escape 'judgementday' for much longer. One way or another he will have to face the EU issue.

The treaty has to be changed and not too far from now on several main issues. Which way exactly is still open but one way or another it will be a major change.
Cameron cannot escape that. So he will have to face rebellion at home and likely his end as PM or face the EU issue (and stand up for the UK).

UK?EU memebership is like the Euro this is a problem that doesnot go away and in a democratic country this means somewhere during that process the voter will have the decisionmaking power. Here by voting UKIP or Labour, or not go voting (and have the same result). Every mistake they make in Euro-land puts the issue higher on the UK public's agenda. Every silly plan by Brussels does the same. Barosso is your friend, well that is a bit too discusting of course, but in a way he is. He isnot only shooting in his own feet but also in Cameron's.

And I see no way how this proces could be reversed. It will remain in the headlines, it will remain on the public's agenda and it will be a very important issue in next election.
As well as the treaty will have to be changed and if Cameron agrees with everything he is politically a dead man walking. So he will have to face reality and try to make the most of it or end up with no backer left (electoral, financial and political). Nobody is going to back up a guy that will have an almost guaranteed record loss in next elections and put possibly permanent competition (UKIP) on the market.

Rik said...

Forgot to mention. Some things simply donot go together.

1. ESM Spanish direct banking rescue. Conditional on banking union especially central oversight.
That is for the part that supposed to be going directly to the banks.
Germany demanded this condition for direct bankingbail outs if I am not mistaken.

2. Germany wants only the sytemic banks ECB regulated. To avoid troubles at home.
However the Spanish banking problems are mainly in the Cajas.
Which are if Germany gets its way not ECB regulated.

Does this mean that no direct banking bail out can take place?
Or do I miss something?