The Phantom of Banking Union

This is a link to an excellent opinion piece in the FT on the recent announcement regarding EU banking union.

The first steps towards banking union announced last week were widely lauded as representing a significant in-principle agreement.  The truth is that this principle was agreed two years ago.  Unfortunately, what happened last week was a failure of the political process to deliver the results logically required by the economic reality in Europe.

First Steps Towards Banking Union Agreed…

…with respect to 200 banks.

As the FT reported today, eurozone finance ministers agreed a plan for a common bank supervisor in the early hours of this morning.  Beginning in early 2013, the ECB will take responsibility for the supervision of banks – but only those having assets of more than €30bn, or representing more than a fifth of a state’s national output.  In addition, there are no explicit provisions governing timeframes in which the ECB is to assume responsibility for the EU’s biggest banks.

The single supervisor is seen as the first, and easiest, step in the three-stage process which will lead towards EU banking union, the other stages being the creation of a EU-wide common deposit guarantee scheme and a single European recovery and resolution framework.  An inability to confidently take this first step does not bode well for the future.  If banking union is to mean anything is must surely create a level playing field, not the two-tier regime threatened by the current political fudge.

EU Parliament adopts Resolution Approving Single EU Banking Supervisor


On 13 September 2012, the EU Parliament published a press release announcing that it has adopted a resolution relating to the establishment of a single EU banking supervisor.  The resolution was adopted the day following the publication by the EU Commission of two legislative proposals on EU banking union.

In passing the resolution, the EU Parliament warned that EU banking supervision rules must be of “good quality”, transparent and accountable, noting that the current preferences of certain Member States “risk sending the wrong message, as well as perpetuating inefficiencies”.  Presumably, this is a reference to German objections to the establishment of a single deposit guarantee scheme, seen as one of the next necessary steps on the road to full banking union, which led to this aspect of the project being shelved, as reported in the Financial Times.  The EU Parliament also seem aware of the need to protect the functioning of the EU single market, an issue preying on the minds of non-eurozone EU countries, as highlighted in this FT article.

EU Council Proposal regarding a Single Supervisory Mechanism (SSM) for credit institutions

ECB Powers

After a transitional period (see below for more details), the European Central Bank’s (ECB) powers will apply to all credit institutions, regardless of their business model or size.  Member States that have not adopted the Euro will be able to participate in the SSM provided that they abide by and implement relevant ECB decisions.   The EU Commission proposals give responsibility to the ECB in a number of areas regarding the supervision of Eurozone EU credit institutions, including:

  • authorisation and withdrawal of authorisation;
  • the assessment of acquisitions and disposals of holdings in credit institutions;
  • the removal of a member of a credit institution’s management board;
  • capital requirements as well as exposure, leverage and liquidity limits;
  • the conducting of stress-tests;
  • the initiation of early intervention measures to restore institutions which are in danger of breaching regulatory capital requirements (this is to be done in co-ordination with national resolution authorities pending the conferral of resolution powers on a European body);
  • assumption of the role of host supervisor for credit institutions established in non-participating Member States which establish a branch or provide cross-border services in a participating Member State;
  • assumption of the role of both home and host supervisor for credit institutions exercising the right of establishment in other participating Member States;
  • assumption of the roles currently held by all participating Member States within colleges of supervisors set up to consider cross-border banking groups;
  • the ability to require information from, and conduct investigations (including on-site inspections) of, credit institutions, their group companies, persons involved in or otherwise connected to their activities and national competent authorities; and
  • the imposition of sanctions for breach of regulations in an amount of up to twice the profit gained or loss avoided because of the breach (where this can be determined), or up to 10% of the total annual turnover of the relevant institution in the preceding business year.

Role of National Supervisors

All tasks not specifically conferred on the ECB will remain with national supervisors.  This will include responsibility for consumer protection, anti-money laundering, and the supervision of third country credit institutions establishing branches or providing cross-border services within a Member State.  In addition, the day-to-day activities necessary to implement ECB decisions appear likely to be performed by national supervisors.  Applications for authorisation as a credit institution within a participating Member State will also initially be administered by national competent authorities, which shall propose to the ECB whether the conditions of authorisation have been met and therefore whether the ECB should grant the authorisation.

Role of the EBA

The ECB would not take over any tasks of the European Banking Authority (EBA).  Specifically, the EBA would retain responsibility for the development of a single rulebook and ensure convergence and consistency of supervisory practice.

Independence and Accountability

The ECB must maintain independence when carrying out its banking supervision role and will be accountable to the European Parliament and to the EU Council.  Monetary policy tasks will be strictly separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision.

Entry into force and Transition Period

The regulation creating the SSM will enter into force on 1 January 2013 (although this FT article would suggest that this deadline may be missed), and will adopt a phased approach.  Although, by way of notification to an institution and its national regulator, the ECB could choose to apply its powers to any bank from the outset, it is envisaged that it will initially apply to those banks which have received or requested public financial assistance, following which it will be extend to the most systemically important banks.  The ECB shall make public a list of those institutions over which it has a supervisory role before 1 March 2013.  Remaining banks will fall under the ECB remit by 1 January 2014 at the latest.

Supervisory fees

The ECB shall levy fees directly on credit institutions in order to cover the costs of the SSM.  The level of fees will be proportionate to the  importance and risk profile of the credit institution concerned.

First Steps Towards EU Banking Union to be Finalised by End of 2012

The EU Commission has published a speech given on 3 September 2012 by Olli Rehn, Vice-President of the European Commission and member responsible for Economic and Monetary Affairs and the Euro on EU banking union entitled “Towards a Genuine Economic and Monetary Union”.

The EU Commission sees banking union as a top priority and proposes a two-stage process.  The first stage involves the establishment of a Single Supervisory Mechanism (“SSM”) for Eurozone banks under the authority of the European Central Bank (“ECB”).  Note, however, that this press release from the European Parliament would suggest that the authority to supervise non-Eurozone banks would remain with the European Banking Authority.

 The legislative proposal for the SSM will be presented by the EU Commission within two weeks, with a view to it being finalised by the end of 2012.  The SSM will apply to all Euro area Member States, but other Member States will be free to participate if they so choose.  As even small banks can represent a source of systemic risk, the SSM will apply to all Eurozone banks.  Whilst the ECB will have prime responsibility for the administration of the SSM, national supervisors will continue to play an important role.

The second stage of banking union will involve the creation of a common deposit guarantee scheme as well as for a single European recovery and resolution framework.