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Friday, September 07, 2012

While everyone is talking bond-buying: Here's the first proposal for an EU banking union (leaked)

That ECB, it's so hot right now.

While everyone is watching and reacting to the ECB announcement from yesterday, the Commission's highly anticipated proposal for an EU Banking Union, due to be released on 12 September, has leaked (courtesy of Italian daily Il sore 24 ore). The full document can be read here.

It's the first chance to analyse the first document in its entirety (though snippets have leaked in various media reports over the last week or so - more to come for sure, that will add to this proposal) and below we highlight some of the key points. We’re still going through the main doc and will update this blog with anything else that catches our eye, but this is what we got so far:
• As expected, the Commission proposes that the ECB should supervise all banks, as the document notes: “recent experience shows that smaller banks can also pose a threat to financial stability. Therefore, the ECB should be able to exercise supervisory tasks in relation to all banks”.
• National supervisors will continue to assist the ECB with preparation and implementation of its new role as necessary, but the ECB will have final authority in most areas (a major change).

• Paragraph 25 of the preamble notes that: “In order to ensure consistency between supervisory responsibilities conferred on the ECB and decision making within the EBA, the ECB should coordinate a common position amongst representatives of the national authorities of the participating Member States in relation to matters falling within its competence.”
• The ECB will have to power to wind down banks if necessary, as well as grant or remove banking licences within the eurozone.
• The ECB will work with the Commission and the ESM to recapitalise ailing banks (this could be a hint that the ESM could form the future resolution mechanism and financial backstop).
• Paragraph 10 of the pre-amble says that “In view of the close interlinkages and spillovers between Member States participating in the common currency, With a view to maintaining and deepening the internal market, and to the extent that this is institutionally possible, the Banking Union should also be open to the participation of other Member States.”
• Paragraph 18 highlights that the ECB has the power to increase capital buffers if deemed necessary under its macroeconomic surveillance.
• Paragraph 41 states that: “Given the globalisation of banking services and the increased importance of international standards, the ECB should carry out its tasks in respect of international standards and in dialogue and in close cooperation with supervisors outside the Union, without duplicating the international role of the EBA. It should be empowered to develop contacts and enter into administrative arrangements with the supervisory authorities and administrations of third countries and with international organisations, subject to coordination with the EBA while fully respecting the existing roles and respective competences of the Member States and the Union institutions.” 
The relationship outlined between the EBA and the ECB is vague but interesting. The ECB (eurozone countries) will be represented as a single bloc in the EBA from now on, meaning, under the voting procedure of simple majority (applicable to settlement of disagreements and breaches of EU law) , the ECB will always have a majority. Also under the new voting weights coming into force in 2014 / 2017, the eurozone will have permanent majority under QMV (applicable to technical standards and some other issues).  Even though the eurozone often voted cohesively previously, the fact that it will now be represented by a single voice and will always vote as a cohesive bloc looks worrying for the UK in future negotiations on financial supervision and regulation.

It is also concerning, from a UK/non-euro point of view, that the ECB will be able to develop international relationships on supervision. This could undercut the wider EU poisition on negotiating international standards such as the Basel III (bank capital) rules and other such issues.

The point in paragraph 10 is interesting as the Commission seems to draw a direct link between a Banking Union and the ‘deepening’ of the single market – which involves all 27 member states – which again raises huge questions over where regulation at the level of all 27 member states ends, and supervision involving 17+ begins.

This ties in with the plans to allow the ECB to increase capital buffers above EU-wide standards, which could see a blurring of supervisory and regulatory powers. It also increases the incentive for the euro countries/ECB to set the agenda in international forums, such as Basel, and in future regulations adopted at the EU level.

Update 07/09/12 16:45 - 
A key discussion – and no doubt one of the key issues that will be subject to intense negotiations once the Commission has tabled all its docs - will be whether the voting weight within the EU financial supervisory structure (ESAs) will change (if the ECB does indeed get involved in votes in, say, the EBA). Will the ECB essentially control all 17 eurozone member votes or condense it into a single vote, or will it simply be a matter of soft coordination. How will non-euro countries ensure that the Eurozone isn’t using an inbuilt majority to basically push through euro-tailored measures? Decisions in the ESAs are taken by a simple majority vote or QMV meaning that anything more than mere ECB coordination, might require rewriting the ESA voting rules and even the standard procedure for calculating weightings (based on population, GDP etc.). Presumably, there should be a safeguard for non-Eurozone countries.


Rik said...

You never get things properly organised and legislated if you not clearly seperate ECB/EZ from the rest. Furthermore it will take ages and makes a an agreement/treaty on this even highly unlikely.
Strong central supervision is imho a necessity within a monetary union. But if that forms the majority in the EU you get absolutely certain huge conflicts of interest.
It won't work and take ages and end up with all sorts of unpractical compromises when you do it differently. You simply need a 2 layer structure with alot of freedom for the outsiders and proper control on the inside.

ESA simply doesnot fit well in this picture. Probably has to be split. General tasks for EU and close watchdog for the EZ. Anyway you probably need the people for the supervision.

As far as small banks are concerned. As we see in Spain and Germany they are simply if they operate as a group systemic. Therefor in a working monetary union should be under central supervision. And you donot really know in advance when they do work together.
Winding down centrally good idea, now one of the problems in Spain.
Same rules for accounting to be able to compare (will likely be very timeconsuming to make that work).

As a central regulator you should be the one with the international contacts.

Problem is not only (even mainly capital). For a proper bankingsector you need proper bookkeeping rules. When start to make provisions, value on the BS, no roll overs to dodge the system allowed, etc.. Probably more important than a proper capitalposition.

Rules to avoid massive highly correlated risk are imho also an essential.

Anyway everybody has been sleeping before the last crisis. So it might help somewhat and we might learn from these mistakes. But as history shows next crisis is most likely coming out of a different corner.

Rollo said...

Thank you, Open Europe, for showing us the plans. Does it make any difference? The ECB is on the way out, as bond yields are showing. They are busy rowing upstream towards the superstate, while the tide is ebbing out faster than they can row.

Idris Francis said...

Debating procedures and arguing about who controls what is in these circumstances like the two pilots, flight engineer, cabin stewards and passengers arguing who should have the joystick after the tail has broken off.

In other words and as I said at the "Spain - too big to fail" debate some months ago, its over, its finished, nothing can save it. Especially the nonsense of these plans which make plain even for those until now in denial, that the EU intends to control everything and make national governments utterly irrelevant.

Democracy it ain't, not that it was ever intended to be.

Let's stop pretending shall we - and just leave and get on with a prosperous and independent future outside this House of Hortors?

christina Speight said...

In this leaked version there are ambiguities! For instance in para 9 it calls for “ a true single rulebook for the single-market as a whole “ This includes Britain and is unacceptable . But in the same paragraph it says “the Banking Union should apply to all Euro area member states?” though being open to other members. This must be a VERY rough draft!

This is a vital document providing -if agreed - a draft regulation applicable throughout the EU and to come into force on January 1st 2013 - a mere 112 days away . I wonder when the rest of the British media will notice.?

Cameron as usual will avoid prior discussion like the plague `and vote to let it happen. However, although I agree with Idris above the final collapse will probably not happen till it is irredeemably wrecked so we need to stop this EU-wide madness in its tracks.