An article in today’s Financial Times reports that, today’s meeting of finance ministers in Brussels is expected to make further progress on the creation of a single banking framework union. Following a meeting of key countries and EU officials in Berlin last Friday, unsubstantiated reports that France and Germany were resolving ongoing differences and a deal was close to completion emerged. Continue reading
On 2 December 2013, the Council of the European Union published a press release announcing that it has approved the Memorandum of Understanding (MoU) (15963/13) between the Council and the European Central Bank (ECB) relating to the single supervisory mechanism (SSM). A few days earlier on 30 November 2013, the Inter-institutional Agreement (IIA) between the ECB and the European Parliament on the implementation of procedures related to the SSM was published in the Official Journal of the EU (OJ).
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.
On 14 December 2012, the European Council published its conclusions regarding the steps necessary to complete economic and monetary union (EMU). These include:
- the need for the rapid adoption and implementation of the single supervisory mechanism (SSM);
- the agreement on the terms of the Recovery and Resolution Directive (RRD) and the Deposit Guarantee Schemes Directive by June 2013; and
- the rapid follow-up to the proposals of the Liikanen Group.
…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.
On 6 December 2012, the EU Council published a report entitled “Towards a Genuine Economic and Monetary Union”, building on an interim report on the same topic published in October 2012. It proposes a timeframe and a 3-stage approach to the completion of Economic and Monetary Union (EMU), describing the RRP-specific requirements which form part of this initiative, as detailed below.
|Stage 1||End 2012 – beginning 2013||
Ensuring fiscal sustainability and breaking the link between banks and sovereigns.
From an RRP perspective, this would involve:
|Stage 2||Beginning 2013 – end 2014||
Completing the integrated financial framework and promoting sound structural policies at national level.
RRP specific measures would include the establishment of:
|Stage 3||Post 2014||
Establishing a mechanism to create the fiscal capacity necessary to enable EMU members to better absorb future country-specific economic and financial shocks.
Single Supervisory Mechanism
The Council regards it as imperative that preparatory measures with respect to the SSM commence at the beginning of 2013, so that the SSM can be fully operational from 1 January 2014 at the latest. This will involve granting strong supervisory powers to the ECB.
Single Resolution Mechanism (SRM)
Measures to establish the SSM are to be complemented by an SRM, build around an SRA and established at the same time as the ECB assumes its supervisory responsibilities with respect to the SSM. Whilst the SSM would provide a “timely and unbiased assessment of the need for resolution”, the SRA would ensure timely and robust resolution measures are actually implemented in appropriate cases. In other words, the SRM would complement the SSM by making certain that failing banks are restructured or closed down swiftly. The establishment of an SRM is regarded as an indispensable element in the completion of EMU as it would:
- Promote a timely and impartial EU-level decision-making process: it is hope that this would mitigate many of the current obstacles to resolution, such as national interest and cross-border cooperation frictions;
- reduce resolution costs;
- break the link between banks and sovereigns; and
- Increase market discipline by ensuring that the private sector and not the taxpayer bears the cost of bank resolution
The SRM would be financed via a European Resolution Fund. In turn, the fund would be financed via ex-ante risk-based levies on all banks directly participating in the SSM. As mentioned previously, the fund would be buttressed by an backstop in the form of an ESM credit line to the SRA. However, any support provided via the ESM would be recouped in the medium term by way of ex-post levies on the financial sector.
Deposit Guarantee Schemes (DGS)
References to an EU-wide deposit guarantee scheme seem to have been dropped in favour of a proposal to ensure that sufficiently robust national deposit insurance systems are set up in each Member State. This, it is hoped, will limit the contagion effect associated with deposit flight between institutions and across countries, and ensuring an appropriate degree of depositor protection in the EU.
Financial Shock absorption function (FSAF)
This stage 3 measure would likely take the form of a contract-based insurance system set up at an EU level. Whilst RRP-specific, the establishment of an FSAF is seen as contributing to macroeconomic stability and therefore providing important support to the effectiveness of bank resolution measures in stages 1 and 2. However, the Council is keen to emphasise that the FSAF would not be an instrument for crisis management per se, as this is a role to be performed by the ESM. Rather, the purpose of FSAF would be to improve the overall economic resilience of EMU and eurozone countries. In other words, it would contribute to crisis prevention and make future ESM interventions less likely.
On 4 December 2012, the House of Lords Sub-Committee on Economic and Financial Affairs wrote a letter to Greg Clark MP, Financial Secretary to HM Treasury, regarding the EU Commission’s proposal for a Single Supervisory Mechanism (SSM).
The Committee believes that EU banking union is “urgently required” but recognises that it has potentially significant risks for the UK, particularly regarding the:
- risk of marginalisation and isolation on financial sector matters and the damage that this could do the position of London as a financial centre;
- threat to the integrity of the single market arising from amended voting structures within the EBA;
- possibility that the authority of the EBA (to which all 27 Member States are a part) could come under the influence of the ECB (which would supervise the operation of the SSM); and
- possible conflict of interest between the SSM supervisory role of the ECB and its responsibilities with respect to EU monetary policy.
The Committee is concerned with the proposed timetable for agreement of the SSM, which it regards as rushed and “wholly unrealistic” (although if this FT article is anything to go by we may not see banking union as soon as was first thought). It also regards attempts to implement banking union without a common deposit scheme, as required by Germany, as being “unsustainable”.
This is a link to an FT article detailing some of the arguments for and against the proposal that smaller banks, particularly German savings banks, should be subject to EU banking union rules in the same way as larger banks. For those looking for a bit of background on the issue, it’s worth a read if you have a couple of minutes to spare.
On 8 October 2012, the EU Parliament’s Committee on Economic and Monetary Affairs (ECON) published a draft report proposing amendments to the European Commission’s draft regulation establishing a single supervisory mechanism (SSM).
The most significant amendment proposed by the EU Parliament would restrict the number of banks coming under direct ECB supervision. Whilst subject to safeguards (and admittedly still in draft form) these proposals nonetheless have the potential to undermine the effectiveness of the SSM as a mechanism for ensuring a coordinated cross-border response to bank resolution within the EU. As such, it will be important to monitor the way in which these proposals develop. More detail on the contents of the draft report is provided below.
Scope of the SSM Regulation
As drafted by the EU Commission, the ECB would have been given supervisory responsibility for “all banks of participating Member States”. In contrast, the EU Parliament amendment proposes that the ECB’s powers be limited to exercising “specific and clearly defined supervisory tasks” in relation to:
systemically important European banks (measured by reference to size of exposures, systemic risk for the relevant domestic economy and scale of cross-border activity); and
banks which have received or requested public financial assistance.
Under the EU Parliament’s proposed amendments, national competent authorities would continue to supervise all banks falling outside the scope of direct ECB supervision. However, the ECB would establish a supervisory framework under which national supervision would take place and would be responsible for monitoring national authorities’ compliance with this framework. The framework would be supported by a requirement on national authorities to report to the ECB on a quarterly basis, and provide notification “without delay” where:
serious concerns exist about the safety and/or soundness of a credit institution falling outside the scope of direct ECB supervision;
the stability of the financial system is or is likely to be endangered by a credit institution falling outside direct ECB supervision; or
a credit institution for which they are competent ceases to fall outside the scope of direct ECB supervision.
The ECB would commence supervision from 1 July 2013 but may, by way of notification, exercise its powers before this date in relation to any credit institution which has received or requested public financial assistance. In addition, the ECB would also retain the right to exercise supervisory power of any Member State credit institution if:
national authorities failed to perform their obligations under the SSM regulation;
there was evidence that a credit institution posed, was likely to pose, or would exacerbate a threat to the single market or financial stability; or
a credit institution falls under the scope of direct ECB supervision.