The U.K. is pressing for the European Central Bank to share power with national regulators as it takes over euro-region bank supervision, according to policy- planning documents obtained by Bloomberg News.
The ECB should have a core set of central powers to oversee all banks in the 17-nation currency bloc while delegating some tasks to individual countries, under one option favored by the U.K. and European Union economic policy officials. The ECB supports a similar “light touch” approach that would leave day-to-day supervision for most banks in the hands of national authorities, the documents show.
Another approach, backed by officials working on EU financial rules, would require the ECB to take major oversight decisions for all banks, the papers show. Officials opposed to this approach say it could compromise the central bank’s reputation and perceived independence, according to the documents, which include EU-level and U.K.-based analysis of the policy debate.
Euro-area leaders in June decided to create a common bank supervisor and beef up the ECB’s oversight role to pave the way for direct bank bailouts from the currency area’s firewall fund. The currency zone’s debt crisis, now in its third year, has forced Ireland, Greece, Portugal and Cyprus to seek broad-based aid, while the Spanish government was granted as much as 100 billion euros ($123 billion) to recapitalize its beleaguered banking system.
So-called banking union is intended to limit financial- market contagion by breaking the link between government finances and bank balance sheets. The European Commission, the EU’s regulatory arm, plans to offer a slate of proposals in September so bloc-wide bank supervision can start in 2013.
“We should expect from the commission a strong proposal, a strong proposal that would put the ECB in a position to carry out its duty with effectiveness, rigor, independence and without risk to its reputation,” ECB President Mario Draghi told lawmakers in the European Parliament last month.
Big banks and lenders that have already gotten government aid could be the first institutions to move to the new supervisory regime, according to the EU policy documents. The U.K. proposed that this initial group might encompass 100 to 150 banks, with others joining over a three-year period unless an emergency forced the ECB to step in sooner.
The U.K. will continue to work constructively with EU partners as the proposals take shape, a British diplomat in Brussels said. The U.K. will press for the euro-zone integration to move forward without hurting the single market among all 27 EU nations, said the diplomat, who spoke on condition of anonymity under department policy.
The ECB could become the day-to-day supervisor for euro- area banks considered systemically significant worldwide or within Europe, as well as for lenders that tap euro-zone rescue funds, according to the documents. The papers show that the central bank agrees that it should directly supervise institutions receiving EU bailouts and could delegate daily supervision of small banks to national regulators. The central bank would be able to override decisions taken by local authorities, according to the proposals.
Ryan Heath, a commission spokesman, declined to comment. An ECB spokesperson also declined to comment on the documents.
Common bank supervision is the first leg in the EU’s path toward banking union, which in the long run is also slated to tackle deposit insurance and how to handle cross-border bank failures. EU leaders decided in June that the euro area could begin bank bailouts as soon as the new supervisor is in place, even though the Netherlands would like to wait until the other elements of the banking union are ready.
Dutch officials want to spread the cost of bank bailouts across all 27 EU nations, according to the policy documents. They also have called for the new bank supervisor to carry out stress tests and for investors to take losses before accessing capital from the euro rescue fund.
In contrast, the U.K. says only the 17 euro nations should be bound by the new rules and included in paying for bailouts, according to the documents. The U.K. also called for the ECB to have flexibility when setting capital requirements and other safeguards, a stance that matches its longstanding push for countries to retain flexibility rather than the standardized approach pushed by the commission.
All of the policy makers working on banking union agree that the ECB will have to be publicly accountable for its bank- supervision decisions. The documents show the commission favors giving the European Parliament a say, while the U.K. would like an oversight role for national parliaments and for the council of European leaders.
The EU also will need to think about the public face of its web of bank-oversight bodies. For example, one of the documents asks, who would take charge in a crisis, and who would explain emergency actions to the public?
These calls for accountability must be balanced by measures to preserve the ECB’s independence as central bank and monetary- policy setter, according to the documents. As the banking-union plan takes shape, EU lawyers are examining how to make sure the ECB does not have an unfair advantage over other regulators because of its autonomy, the documents show. The central bank will need to remain insulated from political interference as it takes on its new powers.
The U.K. suggests that the EU could model the ECB-based supervisor on aspects of the British plan to hand bank oversight to a Bank of England independent unit, known as the Prudential Regulation Authority, the documents say. At the same time, the papers indicate officials in Brussels are monitoring concerns raised by U.K. parliament members, who say the Bank of England is too powerful and lacks sufficient accountability.
Officials are debating how to adjust the European Banking Authority’s role as a coordinator among regulators in all 27 EU nations, the documents say. On assuming the role of bank supervisor, the ECB probably would become the main representative of all 17 euro members. The U.K. will seek to make sure the unified euro zone doesn’t have an automatic majority on the EBA board or have access to a disproportionate amount of shared resources, the documents say.
There’s also debate on whether non-euro nations will be able to participate in board meetings of the new single supervisor and related joint activities. If non-euro members are allowed as observers, the U.K. would like all EU nations to be included, while the European Commission favors granting access only to countries that have committed to join the common currency eventually, the documents say.