September 12, 2012

EC President Unveils Banking Union Plan

Plan gives jurisdiction over eurozone banks and some in EU to ECB

ECB headquarters in Frankfurt. (Photo: AP) ECB headquarters in Frankfurt. (Photo: AP)

A banking union throughout Europe came a little closer to reality with the unveiling of a plan by European Commission (EC) President Jose Manuel Barroso that would not only allow the European Central Bank (ECB) to supervise all eurozone banks, but also give it jurisdiction over a broader, and at first voluntary, EU banking base.

Reuters reported Wednesday that Barroso laid out the plan during his annual state of the union address. While the measure must be approved by EU member states, it implements a break in the close ties between economically challenged countries and the banks that struggle within them. The catch is that countries must give up a portion of their sovereignty to allow an outside body to step in and assert control—a condition that has been a sticking point with both Germany and the U.K.

"The crisis has shown that while banks became transnational, rules and oversight remained national," Barroso was quoted saying in his address to the European Parliament. "We need to move to common supervisory decisions, namely within the euro area." He added, "The single supervisory mechanism proposed today will create a reinforced architecture, with a core role for the European Central Bank ... It will be a supervision for all euro area banks."

The plan has three major parts. First, the authority to oversee all eurozone banks, as well as others in the EU that consent to be supervised, would be conferred on the ECB. The central bank would thus preside over national regulators, and would also have the authority to police banks, impose penalties on them and shut them down if necessary.

Next would come the establishment of a fund to close troubled banks. A third part of the plan is a fully developed method to safeguard people’s deposits throughout the eurozone.

"The challenge is gigantic," said Nicolas Veron in the report. Veron, an expert in EU financial policy with the Brussels-based economics think tank Bruegel, added, "It's not just banking union. Banking reform is part of a broader agenda of integration that has been made more pressing by the crisis."

Banks, of course, are not happy about the plan, proposed to be phased in starting in 2013, nor are Germany, the U.K. and other countries such as Sweden.

Predictably, Germany has objected, and said it would be too much of a drain on the ECB to oversee all 6,000 eurozone banks. Finance Minister Wolfgang Schaeuble, who has previously voiced his opposition, said that things should move slowly in creating a new banking supervisor so that quality would not be sacrificed to speed.

In a statement, he said, "The quality and efficiency of the new supervisor must be the focus. Purely on practical terms it seems impossible for the ECB to monitor 6,000 banks appropriately." That led him to repeat his admonishment that the new supervisor should confine itself to overseeing systemically relevant banks and not try to supervise all eurozone banks.

However, EC officials have pointed out that restricting oversight to only major banks could miss potentially spreading problems such as occurred with Britain’s Northern Rock. In his description of the plan, Barroso said, "Supervision must be able to look everywhere because systemic risks can be anywhere, not just in so-called systemically relevant banks."

London, despite not being in the eurozone and thus not being obliged to participate, doesn’t like the plan because, should the ECB decide to push for broader regulation, such regulation could have the potential to threaten the city’s preeminence as the banking capital of Europe. International banks aren’t crazy about it, either, for fear that there will be some distinction between participating banks inside the eurozone and those outside the bloc that do not choose to opt in.

The Association for Financial Markets in Europe (AFME), which represents banks including Deutsche Bank and HSBC, voiced a warning against "driving a wedge" between countries participating in the banking union and countries outside it.

"If there were to be a hint of restrictions on conducting euro transactions in London, for example, that would be a concern," said AFME spokesman Andrew Gowers in the report. "Banks do not want to be told where they can or cannot conduct business."

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