The European Union unveiled proposals for euro-area bank oversight that require unprecedented cooperation between the European Central Bank and national regulators.
The Frankfurt-based ECB should expand its role as financial-system guardian by becoming the top-level supervisor of every lender in the 17-nation currency bloc, EU officials said in interviews. At the same time, the central bank would depend on national regulators for day-to-day supervision and ensuring that banks comply with European rules, according to the proposals.
“Mere coodination is no longer adequate. We need to move to common supervisory decisions” within the euro area, European Commission President Jose Barroso told the European Parliament today in Strasbourg, France.
EU leaders called for a single bank supervisor in June as a condition of allowing euro-area banks direct access to the zone’s firewall funds. Germany’s top constitutional court today cleared the way for the 500 billion-euro ($644 billion) European Stability Mechanism to become operational later this year.
German Finance Minister Wolfgang Schaeuble said the EU needs to be conservative on how quickly it can establish the new system. “On the timetable, we shouldn’t raise expectations we can’t meet in the end,” Schaeuble said in an e-mailed statement today. “That’s the only way we can win back the necessary confidence that the citizens, the financial markets and all other stakeholders need.”
Schaeuble said the ECB won’t be able to monitor all euro-area banks overnight. EU Financial Services Commissioner Michel Barnier concurred, saying the ECB will work with national regulators rather than dictating all operations from its Frankfurt headquarters.
Barnier also said the plans don’t jeopardize London’s role as a leading financial services center. The banking union proposals are designed so that non-euro countries can join if they wish, he said, declining to say which nations may consider such a move.
EU taxpayers have provided 4.5 trillion euros in capital injections, guarantees and other forms of support to their lenders since 2008, exacerbating strains on public finances that have led Greece, Portugal, Ireland, Spain and Cyprus to seek external aid.
Today’s proposals include safeguards for the U.K. and the other nine nations that don’t use the euro to protect them from being drowned out by their neighbors during rulemaking. The plans aim to phase in the new system by Jan. 1, 2014, and all 27 EU members will need to sign off.
“What’s good about this proposal is it puts some distance between the cops and the gangsters,” Philippe Lamberts, a lawmaker in the European Parliament, said in a telephone interview. “There initially won’t be that coziness between banks and their regulator that has encouraged the regulator to turn the other way.”
“The euro crisis turns around the ECB,” Carsten Brzeski, senior economist at ING Group in Brussels, said in a telephone interview. “Somehow this is the only institution which is regarded to be able to solve the crisis. At the same time, it will also mean there’s a risk the ECB will be overburdened by tasks.”
ECB President Mario Draghi and the Brussels-based European Commission want the single supervisor to be the first step in separating bank backstops from national balance sheets. The Europeans’ long-term vision also includes cross-border deposit guarantees and pooled funds to stabilize troubled lenders.
Today’s proposals would grant the ECB the power to impose sanctions including fines on banks that refuse to apply its decisions, according to the draft texts. The central bank may also carry out raids on lenders’ offices.
Draft legislation says the central bank should be able to apply sanctions that are “effective, proportionate and dissuasive.” The ECB would be able to impose monetary fines as high as 10 percent of a firm’s total annual turnover, or of up to twice the gains from a rules breach.
The Spanish government welcomed the EU proposal, calling it “very positive” in an e-mailed statement. Germany’s ruling Christian Democrats said the ECB should concentrate on systemically relevant banks in a pilot phase of its new supervisory role. “Only then can we draw conclusions how to procede,” the group said in an e-mailed statement.
The Christian Social Union, the CDU’s sister party in the federal parliament, said in a separate statement that it will challenge the plan to include Germany’s Sparkassen savings banks and cooperative banks under the ECB umbrella.
Germany’s BDB private banking group, which represents Deutsche Bank AG and Commerzbank AG, welcomed the commission’s plan to include all banks under ECB oversight, saying in an e-mail today that the banking crisis that kicked off in 2008 showed the capacity of smaller lenders such as IKB Deutsche Industriebank AG to foment crisis.
“These proposals mark the latest step in what will be a very long and tortuous process of discussion and argument,” said Richard Reid, research director for the London-based International Centre for Financial Regulation, in an e-mail.
If the proposals are enacted, the ECB would add bank supervision to its current roles setting monetary policy and, along with the commission and the International Monetary Fund, taking part in the so-called troika that administers bailouts.
The draft supervision law gives the ECB power over the granting and withdrawing of banking licenses in the euro area, as well as over bank capital requirements. The central bank would also be able to instruct lenders to carry out internal stress tests, and take so-called early intervention measures for lenders at risk of financial difficulties, according to the officials.
“The ECB is being leaned on in every direction, from crisis management to medium-term institution building,” Mujtaba Rahman, an analyst at Eurasia Group in New York, said in an e-mail. “It’s unclear whether they are going to be able to successfully navigate these new tasks, especially as it puts the bank in the middle of a difficult conversation between creditor and debtor states.”
National regulators would implement ECB decisions and carry out day-to-day oversight of banks. They would also retain responsibility for consumer protection issues.
Under the draft proposals, the ECB would be expected to answer questions from the European Parliament on its supervisory decisions. It also would present an annual report to members of the assembly and finance ministers.
The plans foresee that the ECB would coordinate euro area policy positions in the European Banking Authority. The London-based EBA drafts financial rules that apply across the 27-nation EU, leading to calls from the U.K. that the authority’s rules should be changed to prevent the authority from becoming dominated by the euro area.
The EBA would set up independent panels to rule on disputes between regulators, under the plans. A majority including both euro-area and non-euro-area regulators would be needed to strike down its decisions.
A U.K. Treasury spokesman, who couldn’t be cited by name in line with government rules, said that the U.K. would ensure that the supervisory law didn’t damage the EU’s common market.