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BackLast week, the European Central Bank (ECB) and the European Parliament agreed the final details for setting up a Single European Supervisory Mechanism (Single Supervisory Mechanism - SSM). The SSM will sit with the ECB. This is not ideal, but the European Parliament was at least able to secure far-reaching supervisory rights. However, there is still some way to go until the European Banking Union has been achieved - and even that is not enough.
Single European Supervisory Mechanism
The financial crisis has exposed the shortcomings of fragmented national supervisory mechanisms in a monetary union. The crisis resulted in a de-facto disintegration of the banking system. Different conditions exist in different countries for banks and subsequently also for borrowers such as companies or private households. What has also been criticised frequently is the fact that national single supervisory mechanisms are too close to national banks thereby making genuine independent supervision impossible. Another objective is to break through the negative feedback loop between banks and national debt, as assuming the private losses of the banks has significantly contributed to the current debt crisis (in contrast to the myth, states had engaged in irresponsible spending).
The European Single Supervisory Mechanism will not really be a Single Supervisory Mechanism as it does not fully apply to all banks within the EU. The supervisory authority, which will sit with the ECB, is only responsible for those banks, which either exceed a volume of 30 billion Euro or whose size exceeds 20 % or more of the GDP of the country, in which they are situated. However, the ECB will have the option to act as supervisor for smaller banks, if it envisages a risk for the stability of a country or the Eurozone. In particular Germany has requested to exempt its smaller “Sparkassen”and ”Landesbanken”. Critics fear - not without good reason - that this division of tasks will lead to conflicts between the ECB and national Supervisory authorities in future.
The ECB in its capacity as supervisory authority will in future be responsible for granting credit institutions authorisation or withdrawing it again, to monitor that banks fulfil all supervisory regulations, to increase or tighten them if necessary, to monitor and increase regulatory capital requirements, to lay down internal control mechanisms for banks and finally to carry out stress tests. The latter will also be an early part of the ECB’s new role to establish where measures are necessary.
That the ECB will be in charge of the single supervision is by no means without problems. However, other options, such as creating a new institution, were regarded as not legally possible. The ECB, which already has large powers in respect of a monetary policy, which is singly oriented towards the fight against inflation, has been greatly strengthened in the crisis. In its capacity as an independent institution it is often criticised as undemocratic resp. irresponsible concerning the public. Apart from that it has to be feared that the ECB mixes monetary policy and Single Supervisory Mechanism, which would result in target conflicts. A number of regulations, which were only agreed last week between Parliament and ECB - thereby preparing the way for passing the respective legislative acts -, shall avert these dangers.
To begin with, ECB employees, who are entrusted with the Single Supervisory Mechanism, shall be strictly separated from staff engaged in monetary policy. A separate committee for the Single Supervisory Mechanism will be created within the ECB. The European Parliament has pushed through a number of provisions, which shall ensure a democratic control. The chairman of this supervisory board shall be appointed in an open process, whilst his deputy will come from the ECB Governing Board. European Parliament and Council will have the option in both cases to veto the appointment and to put in motion revocation proceedings, if they feel it necessary. Apart from that, the ECB will regularly report to Parliament, answer questions of MEPs and under certain circumstances also share confidential information with MEPs. Hopes are high; however, there are also fears that the ECB will continue its practice to ignore democratic institutions and cooperate with Parliament as little as possible.
What happens next?
However, a Single Supervisory Mechanism does not yet turn the Banking Union into reality, as the responsibility for resolving banks will initially remain with individual Member States. Hence, the next important step is setting up a solid and uniform mechanism to resolve banks (Single Resolution Mechanism - SRM). Currently two bills are under discussion, one concerning the terms, under which banks will be resolved in future and another to establish a Single European Mechanism. The most important objective of a new SRM is to save public households, hence the general public, to once again having to bail out banks. Hence, the intention is to first make private investors of a bank to foot the bill. If a bank gets into difficulties, up to 8 % of its obligations will be converted into equity capital in future. If this is not sufficient, a bank may in future also be financed by funds from a resolution fund, financed by banks. Only then, public funds, for example from the national budget or the ESM shall be drawn upon for recapitalisation. However, there are still some unanswered questions as the fund will require another 10 years until the banks’ contributions have made up its full size of about 55 billion Euros. Apart from that, the current proposal of the Council, as the Green MEP Sven Giegold criticises, still includes provisions, which would allow countries to rescue banks from public funds even earlier in the process.
The proposal of the Commission was generally welcomed in the debate on the SRM in the European Parliament’s Economic and Monetary Affairs Committee ECON. In particularly open is here the question of responsibility, as will it be the Commission resp. an agency set up by it, which shall decide when a bank will be resolved. Arrangements will have to be made to secure the European Parliament and thereby the citizens adequate control mechanisms.
Finally, the debate also showed that even though the completion of the Banking Union - provided it can succeed in particular against German resistance - is important, the new mechanisms to resolve ailing banks will not be adequate, to prevent in case of a systemic financial crisis, such as the one we just experienced, new bank bail outs with public funds.
The SSM is without a doubt a step in the right direction and it is important to continue to pursue the RSM. However, both are not sufficient to reduce systemic risks. Even a Banking Union will have banks, which are “too big to fail” and investment transactions and normal bank activities will still not be separated. Proposals, which address this structural problem, such as the report of the group of experts under the chairmanship of the Finnish Central Bank President Erkki Liikanen, have been currently away in the drawers of the Commission.
Further information
DIRECTIVE OF THE EUROPEAN PARLIAMENTS AND THE COUNCIL establishing a framework for the recovery and resolution of credit institutions and investment firms
PROPOSAL for a COUNCIL REGULATION conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions
Press release of the Commission on adopting the SSM
Press Release of the Commission on the SRM
The financial crisis has exposed the shortcomings of fragmented national supervisory mechanisms in a monetary union. The crisis resulted in a de-facto disintegration of the banking system. Different conditions exist in different countries for banks and subsequently also for borrowers such as companies or private households. What has also been criticised frequently is the fact that national single supervisory mechanisms are too close to national banks thereby making genuine independent supervision impossible. Another objective is to break through the negative feedback loop between banks and national debt, as assuming the private losses of the banks has significantly contributed to the current debt crisis (in contrast to the myth, states had engaged in irresponsible spending).
The European Single Supervisory Mechanism will not really be a Single Supervisory Mechanism as it does not fully apply to all banks within the EU. The supervisory authority, which will sit with the ECB, is only responsible for those banks, which either exceed a volume of 30 billion Euro or whose size exceeds 20 % or more of the GDP of the country, in which they are situated. However, the ECB will have the option to act as supervisor for smaller banks, if it envisages a risk for the stability of a country or the Eurozone. In particular Germany has requested to exempt its smaller “Sparkassen”and ”Landesbanken”. Critics fear - not without good reason - that this division of tasks will lead to conflicts between the ECB and national Supervisory authorities in future.
The ECB in its capacity as supervisory authority will in future be responsible for granting credit institutions authorisation or withdrawing it again, to monitor that banks fulfil all supervisory regulations, to increase or tighten them if necessary, to monitor and increase regulatory capital requirements, to lay down internal control mechanisms for banks and finally to carry out stress tests. The latter will also be an early part of the ECB’s new role to establish where measures are necessary.
That the ECB will be in charge of the single supervision is by no means without problems. However, other options, such as creating a new institution, were regarded as not legally possible. The ECB, which already has large powers in respect of a monetary policy, which is singly oriented towards the fight against inflation, has been greatly strengthened in the crisis. In its capacity as an independent institution it is often criticised as undemocratic resp. irresponsible concerning the public. Apart from that it has to be feared that the ECB mixes monetary policy and Single Supervisory Mechanism, which would result in target conflicts. A number of regulations, which were only agreed last week between Parliament and ECB - thereby preparing the way for passing the respective legislative acts -, shall avert these dangers.
To begin with, ECB employees, who are entrusted with the Single Supervisory Mechanism, shall be strictly separated from staff engaged in monetary policy. A separate committee for the Single Supervisory Mechanism will be created within the ECB. The European Parliament has pushed through a number of provisions, which shall ensure a democratic control. The chairman of this supervisory board shall be appointed in an open process, whilst his deputy will come from the ECB Governing Board. European Parliament and Council will have the option in both cases to veto the appointment and to put in motion revocation proceedings, if they feel it necessary. Apart from that, the ECB will regularly report to Parliament, answer questions of MEPs and under certain circumstances also share confidential information with MEPs. Hopes are high; however, there are also fears that the ECB will continue its practice to ignore democratic institutions and cooperate with Parliament as little as possible.
What happens next?
However, a Single Supervisory Mechanism does not yet turn the Banking Union into reality, as the responsibility for resolving banks will initially remain with individual Member States. Hence, the next important step is setting up a solid and uniform mechanism to resolve banks (Single Resolution Mechanism - SRM). Currently two bills are under discussion, one concerning the terms, under which banks will be resolved in future and another to establish a Single European Mechanism. The most important objective of a new SRM is to save public households, hence the general public, to once again having to bail out banks. Hence, the intention is to first make private investors of a bank to foot the bill. If a bank gets into difficulties, up to 8 % of its obligations will be converted into equity capital in future. If this is not sufficient, a bank may in future also be financed by funds from a resolution fund, financed by banks. Only then, public funds, for example from the national budget or the ESM shall be drawn upon for recapitalisation. However, there are still some unanswered questions as the fund will require another 10 years until the banks’ contributions have made up its full size of about 55 billion Euros. Apart from that, the current proposal of the Council, as the Green MEP Sven Giegold criticises, still includes provisions, which would allow countries to rescue banks from public funds even earlier in the process.
The proposal of the Commission was generally welcomed in the debate on the SRM in the European Parliament’s Economic and Monetary Affairs Committee ECON. In particularly open is here the question of responsibility, as will it be the Commission resp. an agency set up by it, which shall decide when a bank will be resolved. Arrangements will have to be made to secure the European Parliament and thereby the citizens adequate control mechanisms.
Finally, the debate also showed that even though the completion of the Banking Union - provided it can succeed in particular against German resistance - is important, the new mechanisms to resolve ailing banks will not be adequate, to prevent in case of a systemic financial crisis, such as the one we just experienced, new bank bail outs with public funds.
The SSM is without a doubt a step in the right direction and it is important to continue to pursue the RSM. However, both are not sufficient to reduce systemic risks. Even a Banking Union will have banks, which are “too big to fail” and investment transactions and normal bank activities will still not be separated. Proposals, which address this structural problem, such as the report of the group of experts under the chairmanship of the Finnish Central Bank President Erkki Liikanen, have been currently away in the drawers of the Commission.
Further information
DIRECTIVE OF THE EUROPEAN PARLIAMENTS AND THE COUNCIL establishing a framework for the recovery and resolution of credit institutions and investment firms
PROPOSAL for a COUNCIL REGULATION conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions
Press release of the Commission on adopting the SSM
Press Release of the Commission on the SRM