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Euro-zone banking union - The union movement

2012-09-18 11:43:45

Plans for common supervision could easily turn messy

Sep 15th 2012 | BERLIN | from the print edition

TOUGHER and more consistent bank supervision in Europe might have prevented

some of the worst bank failures of recent years. It is also the price demanded

by the euro zone s creditor countries in return for using rescue funds directly

to recapitalise struggling banks in the euro area. So the unveiling on

September 12th of a European Commission proposal for unified bank supervision

in the euro area, under the auspices of the European Central Bank (ECB), is a

step in the right direction. But there is a danger that the result will be a

bureaucratic mess that polarises the haves and have-nots of the euro zone,

while further dividing the euro-zone and non-euro-zone members of the European

Union.

The common banking regulator for the 27 EU states is currently the European

Banking Authority (EBA). National supervisors under its purview, but outside

the euro zone, will continue to behave as before. Those within the euro zone

will start to come under the wing of the ECB from January, in what the

commission calls the Single Supervisory Mechanism (SSM).

The EBA came in for fierce criticism last year for its handling of EU-wide bank

stress tests. In its defence, the EBA had no power to second-guess national

supervisors. The ECB will have more muscle. It will be able to drill deep into

individual banks, and it will carry out its own stress tests within the SSM

area. As for the task of taking over supervision of all 6,000 or so euro-zone

banks, which it must do by January 2014 at the latest, that is not quite as

daunting as it first looks, since most of the legwork will continue to be done

by national supervisors.

This rearrangement will mean, however, that the ECB will have a hulking

presence on the EBA s supervisory board a gorilla in the room , says Nicolas V

ron of Bruegel, a think-tank. The commission has had to write an elaborate

amendment adjusting the EBA s voting mechanism so that the out countries are

not outvoted each time by the gorilla. This is particularly sensitive ground

for Britain, home to the EU s biggest financial-services centre and to the EBA

itself. It fears being defeated in disputes about the cross-border application

of banking rules. Although the EBA is the arbiter in such disputes, it is not

allowed to boss the ECB around. So a three-man independent panel , with at

least one member from a state outside the SSM, is expected to opine in such

cases.

The commission s proposals are also meeting resistance within the euro zone,

particularly in Germany, which would prefer the ECB to concentrate on fewer,

bigger banks. Aspirations to move towards harmonised deposit-guarantee schemes

and bank-resolution mechanisms cause even more alarm. German savings banks and

mutual banks are used to the idea of mutualised guarantees: they have formed

joint-liability groupings, which vouch for the solvency of each bank in their

group. They are far less keen on having to vouch for banks outside Germany.

The commission hopes that EU governments and the European Parliament will adopt

its proposals by the end of the year. That timetable may slip. Banking union

must proceed carefully, says Wolfgang Sch uble, the German finance minister.

We can t afford to make mistakes.

from the print edition | Finance and economics