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Thursday, December 13, 2012

ECB as the single bank supervisor: How high is the Chinese wall?

We’ve already assessed the impact of the new single supervisor with regards to the UK and the EBA, here and here, but there is also the obvious question of how the ECB will fare as the single supervisor.

The utmost attempt has been made to stress the separation of supervision and monetary policy within the ECB, but the fundamental fact remains that the ECB Governing Council still has a veto over the decisions of the supervisory board.

The regulation introduces a ‘mediation panel’ to “resolve differences of views” between the Supervisory board and the Governing Council (GC). However, it seems fairly clear that this panel will not be able to vote to overturn the GC decisions but simply provide another talking shop to resolve any differences. As we pointed out before this is the maximum separation allowed under the treaties and therefore the limits how high the Chinese wall between supervision and monetary policy actually can be.  Practically, separation may hold in placid times but in times of crisis it is not clear whether this will be sufficient.

There are also a few other remaining concerns and questions:
  • A non-euro country can reject a decision which has been altered by the ECB GC, however, it then runs the risk of being kicked out of the banking union.
  • When exactly can the ECB take over supervision from national regulators? This seems to be mostly the ECB’s own decision, however, the instances are very loosely defined and the relationship between the ECB and the national supervisors remains fairly vague. Expect turf battles.
  • What does the €30bn asset threshold apply to – i.e. does it include off balance sheet items – and who determines this?
  • The regulation goes to great lengths to ensure that there is a clear flow of all “relevant” information between national supervisors and the ECB. However it is not clear who decides which information is “relevant”, meaning that the "principal-agent" problem still holds. In other words, the national supervisors are likely to have superior information about the banks still under their direct supervision and may have interests which run counter to the ECB.
  • As we have noted previously, this puts a huge number of tasks under the ECB’s purview – there is yet to be a clear declaration of the democratic oversight of tasks (such as supervision) which should be held to account. There is also the practical question of how it will manage these tasks in terms of staffing, offices and funding.
Plenty of details still to be fleshed out then and questions remain about how effective a single supervisor the ECB will become. And as ever, though significant, this is only the first part of what will be a very, very long journey towards an EU banking union.


Rollo said...

The usual strory: The ECB has made a complete cock of the Eurozone; so let's give them some more powers..

Idris Francis said...

Rollo is absolutely right - in any rational economic system people who had messed up like this lot would be in jail, not grabbing even more power to mess up even more lives.

The short answer to all the questions posed in the article is that it too is a complete and unworkable mess, another catastrophe waiting to happen.

In a world that changes ever faster they are changing their sytems in ways that can only slow down decision-making.

Would anyone here design such a system, starting from a blank sheet of paper? Anyone? I thought not.

Idris Francis said...

This interesting letter has reappeared as an undated cutting, probably from the Telegraph

The following fell out of my files. From the typeface, I believe it to have come from the Daily Telegraph.


The first I heard of a common European currency (letter Nov 25) was from General von Vietinghof, to whom as a very junior officer I was escort at Bologna in April 1945 just after he surrendered the German forces in the central Mediterranean.

Apart from his outrage at being put in charge of a 20 year old lieutenant , he let me know that a Franco-German agreement had taken place in 1940 just after Dunkirk and the splitting of France into "Occupied" and "Unoccupied" zones, and that Europe would become one state controlled by Germany and France regardless of what happened from then on.

He boasted that Germany had obtained the agreement of France to run Europe after the war, regardless of the military outcome: "The French are our friends". He told me that there would be one currency which would create a European state under German dominance

Bognor Regis, W. Sussex.

I have Googled Mr.Langead and confirmed that he is a real person - e.g. a newsletter from his school, Bloxham, and a 1947 item in the London Gazette.

We can reasonably assume that he wrote the truth. Given than, why would we want to have anything more to do with the Franco-German European State?

With friends like that, who needs enemies?