EU leaders have at last agreed detailed proposals to set up a single eurozone banking supervisor, which is expected to go live on 1 January 2013, although it will still be many months before it is fully operational. The compromise deal, hammered out between Germany and France was reached at latest EU summit in Brussels, Belgium, and puts some ‘meat on the bones’ of a pact first made back in June. It is a major step towards a single banking union across the continent and one of the prime measures deemed necessary to alleviate the sovereign debt eurozone crisis, which has been concerning corporate treasurers around the globe for some time now.
A legislative framework will be in place by 1 January, with the single eurozone banking supervisor starting work later on in 2013.The European Central Bank (ECB)-led body will have the power to intervene in any bank within the eurozone and to launch rescue bids. The early launch date is important because only when the single supervisor is fully operational can the eurozone’s rescue fund inject cash directly into ailing banks in Spain, hopefully alleviating the eurozone crisis. “A decision about how to recapitalise Spain’s banks will be made in the next couple of weeks,” said Jean-Claude Juncker, chair of the Eurogroup of finance ministers, in press reports.
A compromise between France and Germany was necessary for the deal to be reached, as both had earlier disagreed over the timing and the number of banks that the ECB-administered single supervisor should oversee. Much wrangling may still lie ahead at the latest EU summit or in the weeks ahead of the launch date.
France and the European Commission (EC) wanted joint banking supervision, with the ECB in the lead role, to become operational in January 2013, whereas the German Chancellor, Angela Merkel, has been emphasising that national budget discipline should be the priority. It appears the latter has given ground to reach the compromise, which may eventually also open up the way for eurobonds in the future as well, although this is a separate matter.
According to the draft plan, all 6,000 banks in the 17-nation eurozone would be included under the auspices of the single supervisor. Germany originally wanted it limited to only the biggest ‘systemically important’ banks, as it would like to see the country’s regional Landesbanks exempted from European-wide control. The German supreme court also had to make a ruling recently to allow German taxpayer money to go into the European Stability Mechanism (ESM) rescue fund after the legality of this had been challenged, illustrating the political troubles in Germany of being seen as the eurozone’s banker.
The banking union proposals that now been hammered out follow a three-phased plan, introducing:
- Single supervisory mechanism (SSM).
- Joint resolution scheme to wind down failing banks.
- Joint deposit guarantee scheme.
The new ECB-administered structure will begin with the SSM in the new year, with the later elements to follow. Announcing the result of the summit talks, European Council President, Herman Van Rompuy, said that the 27 EU member states had agreed to set up by year end, “a single supervisory mechanism [SSM] to prevent banking risks and cross-border contagion.”
“Once this is agreed, the SSM could probably be effectively operational in the course of 2013,” he added.
When clarifying the new powers available to on-site reporters, the EU Commission president, Jose Manuel Barroso, explained that the ECB “will be able to intervene if needed in any bank in the euro area”. In others words the new supervisory powers at the ECB’s disposal can be used to stop a dangerous accumulation of debt on a bank’s balance sheets, without having to first lend money to a sovereign government, thereby ruining the country’s debt rating. The European Stability Mechanism (ESM) rescue fund will be able to recapitalise struggling banks directly from now on, which is a major advance.
The UK, which has the continent’s largest financial services hub in London, will not be covered by the new SSM as it remains outside the single currency zone and, politically, does not want to be ruled from Brussels. The stance could leave the country isolated, however, and mean that EU rules covering all banking and finance rules for the entire 27 EU members will effectively be set by the core 17-member eurozone countries. Britain may soon face a stark choice about whether it wants to stay in or out of the EU, or at the very least will have to lobby hard to ensure that the interests of the City of London are listened to in Brussels.
According to Barroso the arrangement would be, “as inclusive as legally possible for non-euro members to join if they want to”. But this is unlikely to satisfy the UK, which wants guarantees to protect the powers of the Bank of England (BoE).
Speaking at a subsequent press conference, the French president Francois Hollande maintained that: “We are on track to solve the problems that for too long have been paralysing the eurozone and made it vulnerable.” Let us hope that he is right, but the power struggle between national rights and over-arching European governance is likely to continue.
Thomas Huertas, a partner in the financial services unit at Ernst & Young EMEIA, believes that, “the heads of state of EU member states have essentially ‘agreed to agree’ that banking union will go forward. They have also agreed that there will be closer integration among the  eurozone states, which is a strong endorsement for the ‘more Europe’ solution. It may, however, consign those unwilling to sign up for ‘more Europe’ [like the UK] to a subsidiary role.”
“Although important details remain to be fleshed out, the overall direction is clear,” he added. “The ECB will become the single supervisor for all banks in the banking union and this supervisory responsibility will be separate from monetary policy. Provisions will be made for non-eurozone member states that wish to participate in the euro-zone integration [as Barosso said]. Together with the eurozone states, this ‘coalition of the willing’ will determine EU banking policy in future. There is a risk that a two-speed Europe will evolve. The finer details around governance will be key. Those countries [like the UK] that choose not to participate in banking union currently run the risk of being left out of decision-making on financial matters in Europe. The single market could increasingly drift into two sectors – those inside the banking union and those outside.
“We still need fuller answers as to the role national regulators will play and how the single supervisory mechanism would relate to the other components of banking union, namely resolution and deposit guarantee schemes. The Commission clearly stated that full banking union required a single resolution authority and a single deposit guarantee scheme but did not provide further details. Under the Commission’s original proposal, the ECB has the power to withdraw a bank’s authorisation, the power to ‘pull the trigger’, but it is unclear what would happen next. How will banks be resolved, and how will deposits be protected? Is it realistic to think that the ECB can simply hand the problem back to national resolution authorities? Or, does handing the ECB the power to put banks into resolution merely hand the ESM rescue fund the responsibility to recapitalise them? The full impact of the proposed banking union cannot accurately be assessed until these details are defined.”
One step has been made forward, therefore, but as ever in Europe there are many more steps still to be taken and no doubt much political wrangling still lies ahead.
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