Monday, November 24, 2014

A New Year’s Banking Union

BRUSSELS – Five years after the outbreak of the financial crisis, Europe’s economic and political situation remains fragile. A mild recession is expected in Europe this year, and unemployment is on the rise. Beyond deficit reduction, we need to implement a €120 billion ($155 billion) European investment plan, and deepen the European Single Market to unleash its growth potential.

But we also need other structural measures. The European Union must put an end to the negative feedback loop between individual member states and their national banking systems. Between 2008 and 2011, EU taxpayers granted banks €4.5 trillion in loans and guarantees. In some countries, the threat of bank recapitalization with public funds has resulted in a drop in market confidence and a huge rise in interest rates.

The European Central Bank (ECB) has taken decisive action to break this vicious circle. Moreover, there is now a consensus that the 17 eurozone countries need a banking union to accompany their common currency. The European Commission has proposed a single rulebook for banks’ capital requirements; mutual support between national deposit guarantee schemes; and Europe-wide rules for resolving failing banks that place the main burden on bank shareholders and creditors, not on taxpayers.

On June 29, European heads of state and government committed themselves to the creation of a single European supervisor for banks in the eurozone. This is good news for both financial stability and public finances: once the single supervisor is in place, supervision will be more credible and impartial, which is important for dealing with ailing banks and managing their return to viability.

The European Commission also put forward a set of legislative proposals to establish the single supervisory mechanism and confer key supervisory tasks on the ECB. This proposal must now be amended and approved as soon as possible by the European Parliament and the Council of Ministers if we are to have a chance of activating the European Stability Mechanism (ESM) and proceeding with the other essential pillars of a banking union.

Further work, however, is still needed in several areas:

  • The scope of the new supervisory mechanism. Some member states favor restricting European supervision to systemically important banks. But the Commission believes that it should cover all 6,000 banks in the eurozone. After all, “systemically important" is impossible to define. The failures of banks like Northern Rock, Dexia, and Bankia are reminders that small and medium-size banks can endanger the entire financial system. And it would be inherently unstable to have two supervisory mechanisms for banks operating in the same market.
  • The participation of non-eurozone countries in the new supervisory scheme. The Commission’s proposal confers powers on the ECB for the supervision of all banks in the eurozone. For non-eurozone countries, the proposals provide for a mechanism to join on a voluntary basis and submit to the ECB’s authority. But the EU treaties make it complicated to give these non-eurozone countries full voting powers. I do not see any political problem with giving these countries a full voice in shaping the decisions of the European supervisor, but creativity will be needed to find a legally sound and fair solution.
  • National supervisors’ role in the new system. Clearly, the European Council has decided on a paradigm shift: powers are moving to the ECB. But national supervisors will be members of the board that will take key decisions, which they will prepare and implement. In the current negotiations, we can still fine-tune the roles of the European and national supervisors, but ultimate authority must rest with the ECB.
  • Non-eurozone EU members that do not want to join the single supervisory mechanism. These countries have expressed concerns about the new powers conferred on the ECB. In particular, they question the ECB's voting rights within the European Banking Authority, which will remain in charge of developing a single rulebook for all 27 countries in the EU’s single market and enhancing convergence of supervisory practices. We need to find ways to preserve fully the influence of non-eurozone countries within the European Banking Authority.
  • Democratic accountability for the ECB’s new supervisory powers. The ECB must, of course, maintain its full monetary-policy independence, despite its new role. So a key question is how, in addition to giving an important role to the European Parliament, national parliaments can play their part in overseeing supervisory decisions.
  • Timing. According to some EU countries, the Commission’s proposal is too ambitious to enter into force at the beginning of 2013. But an effective single banking supervisor is a prerequisite for the ESM’s direct recapitalization of banks. Only with this possibility and strong unified supervision will Europe be in a position to break the vicious circle between banks’ balance-sheet weakness and sovereign debt, and thus resolve the eurozone crisis.

Entry into force in January 2013 would bring about supervision by the ECB of banks that have received or requested public funding. Only in July 2013 would all banks of major systemic importance be subject to ECB supervision. The remaining banks would be subject to the new mechanism at the start of 2014.

Intense discussions are normal for such a high-stakes project. Countries like Germany, Finland, and the Netherlands are right to argue that rapid progress cannot come at the expense of the new supervisory structure’s quality. But EU countries have to stick to the commitment that they made in June and strike a deal in time for a gradual entry into force in January 2013.

Read more from our "Sticking with the Banking Union" Focal Point.

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    1. CommentedRimvydas Mieliauskas

      A global crisis - forecast...

      My letter is about the next stage of the current crisis. Now about my forecast accuracy - as I chose a job in Scotland in 2005, I have been thinking about this crisis; I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages - how it will start and develop in USA and UK, but I didn't predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.

      Global debt and derivatives market is like a gigantic house of cards, if you take a one card or a one big bank out, you are having crash, as show 2008 crisis, now this gigantic financial house of cards is very fast growing - FINANCIAL IMPLOSION: Global Derivatives Market at $1,200 Trillion Dollars … 20 Times the World Economy

      USA, UK, EU and Japan are trying to fix a this gigantic financial bubble or a house of cards by printing the money: trillions dollars, pounds, euro, yen, it is visible part of this crisis and there is invisible part - the tax havens, where is 21-32 trillions $ - main reason for this crisis and the biggest danger now.

      A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
      1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis - the financial black holes - tax havens: sixty years ago, USA companies accounted for 32.1% of the federal tax take, but by 2009 that proportion plummeted to 8.9%, over the same period, the burden on ordinary workers (paying standard payroll tax) soared from 10% to 40% of all federal tax receipts, according to official data, the same processes took place in all developed countries and the tax havens sucked from world economy 21-32 trillions $.
      2. The decreasing dollar market share.
      3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar...
      4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
      A only way to reform the global financial system and central part of it - the tax havens, is crash, a only one question is when?


    2. CommentedAndré Rebentisch

      I had assumed that the supervision would be in the hands of the antitrust purvue, meaning "too big to fail" = "too big". How to batten down the hatches? How to limit the risk exposition of single institutions? All this reminds me less of a "union" but a "framework" or "order" but I have little experience in political marketing.

    3. Portrait of Christopher T. Mahoney

      CommentedChristopher T. Mahoney

      It may be worth noting that in the Dollar Zone, national supervisors (state banking commissions) play a negligible role in banking supervision, with the minor exception of New York. This goes a long way toward preventing cronyism between the state and its banks, and also frees the banks from pressure by the state to engage in directed lending. If the eurozone is to become an effective banking zone, the national central banks should be abolished. This would also help to reduce the risk of redenomination.

        CommentedAndré Rebentisch

        I can't see how milksop enforcement provides a model for Europe and an adequate response to the fallout of the US mortgage crisis exported to European banks. It was American financial market organisation which got discredited. Cronyism is certainly an ethos defect of public servants which we do not expect and cannot tolerate, and the national banks are still more resistant to capture than European level institutions. Weakening authority to avoid procedural corruption seems a twisted logic but maybe I got you wrong.

    4. CommentedZsolt Hermann

      The most frightening aspect of the management of the global crisis is that all the "solutions", "bailouts", corrections are aimed at the banks and nothing else.
      It seems the financial industry has become the holy grail, the only sacred institution of humanity, and that it has to be preserved at all cost.
      This does not make sense at all since banks, financial institutions should be simply services, assistance for other functions, processes in life.
      But today the tail is wagging the dog and the banks dictate.
      This is all the result of the excessive, constant quantitative growth machine forcing people and nations to go way beyond their means necessitating credit and more credit until now everybody depends on them, and are buried under them.
      But banks are not the pillars humanity can stand on, as we see each day it does not matter how much money is poured into the banks, how "stable" these institutions look the individuals and nations continue sliding deeper and deeper into existential trouble, threatening with violent breaks all over the place.
      The only real solution is a return to a necessity and available resources based economy and appropriate global, mutual management, where banking can return to its previous, proper, assisting role, and the resources could be channelled to where they are truly needed: providing human living conditions and natural necessities required for a modern 21st century life for everybody.

        CommentedMelanie holzman

        From the moment you wake until you sleep -- your day is impacted continuously by the mechanism(s) of transactions. Going back to barter or total self-sufficiency is not on the table currently.
        Trust me, I am banked out too.

        CommentedMark Pitts

        @Zsolt - The rationale for the focus on the banks is that without a healthy financial sector, you can't have a healthy economy.