Wednesday, December 05, 2012

Banking union and the EBA: where do we stand?

Yesterday, EU finance ministers failed to reach an agreement on a single eurozone banking supervisor. Ahead of the meeting, the Cypriot Presidency put forward a new compromise proposal aimed at concluding a deal before the next EU summit on 13-14 December.

We have had a look at the latest drafts. Starting with the new voting rules within the EU-27 banking watchdog, the European Banking Authority, these are the most interesting changes proposed by the Presidency:

Voting on technical standards/end of restrictions on financial activities/EBA budget

European Commission proposal: QMV - meaning that countries outside the eurozone which do not want to join the new ECB-led Single Supervisory Mechanism (SSM) risk being in permanent minority

Cypriot Presidency proposal:
QMV stays, but it must include at least a simple majority of countries participating in the SSM (say at least nine, assuming that only eurozone countries join the SSM) and a simple majority of countries not participating in the SSM (say at least six, assuming that none of the non-eurozone countries joins the SSM)

This goes in the right direction, although we proposed going one step further and having all decisions in this group adopted by 'double QMV' - i.e. a qualified majority of participating countries and a qualified majority of non-participating countries.

Voting on breaches of EU law/dispute settlement

European Commission proposal: An independent panel (composed of three people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states - including at least three countries participating in the SSM and three countries not participating in the SSM

Cypriot Presidency proposal: A larger independent panel (composed of seven people) takes a decision. The decision is considered as automatically adopted unless it is rejected by a simple majority of member states participating in the SSM and a simple majority of member states not participating in the SSM

And here is where the main problems with the Presidency's proposal lie, according to us:
  •  A larger panel is good in principle. However, the proposal fails to specify how many of the seven members should be from countries not participating in the SSM;
  •  Even assuming a three 'ins' + three 'outs' + the Chairperson composition of the panel, decisions would still be taken by simple majority - i.e. four of seven members;
  • Overturning a decision taken by the panel becomes even more difficult under the Presidency's proposal, given that a simple majority of 'ins' and a simple majority of 'outs' are both needed to do so. Therefore, the proposal would end up giving the independent panel (and the EBA) more power. This is why we proposed that, instead of this 'reverse majority' system, decisions taken by the independent panel should be confirmed by both a qualified majority of countries participating in the SSM and a qualified majority of countries not participating in the SSM.
Enough technicalities for now - we will look at the ECB Regulation in a separate blog post.


Rik said...

I am not a big EBA fan. They had to do 2 important things in their existence, 2 stresstests and simply messed them completely up and came up with a heavily 'politicized' outcome totally neglecting their pricipal task.
Difficult to see how this could work also in the future.

The only way to do it quickly is imho via the ECB they already have some of the infrastructure, knowhow and manpower in place.
It looks however that it will be long term. If that happens anyway better a seperate agency/authority.
But not the EBA as mentioned earlier or a complete revised one without political interference and this time with technical knowhow.
My main reason for that is that the ECB has become the most powerful EU institute but has no democratic legitimation at all. And has shown that it is willing to get outside its mandate. Which imho should not happen with a CB for a large group of countries with hugely conflicting interest.
It simply has to be kept under democratic control.

The thing should not only be politically acceptable but should also work. Difficult to see how that would be possible if major groups of smaller banks (basically there is where most of the present problems are) were excluded.
In this set up the Cajas would be excluded. Simply an awful set up.

Funny thing that apparently only the larger banks should be centrally supervised. But on the other hand smaller banks in Spain are the ones in trouble so need the recap. Which is conditional on EU central bankingsupervision. Nobody has yet explained me why we have to wait for bankingsupervision that will not cover the banks that need the recap. Or will they be completely excluded (from the ESM recap)? And we will hear that in 1 or 2 years from now?

Anonymous said...

EBA decisions should require the unanimous assent of all EU member states whose currency is not the euro.

Bugsy said...

To my rather simplistic mind this sounds like handing power to the net receivers.

Rollo said...

The EBA is simply another power grab on the way to ever closer union. It is another tendril of the cancer which is the EU, and is slowly killing off Europe as an economic power-house. We must not allow any foreign power to dictate to our parliament or any of our industries. This does not mean that we cannot agree sensible legislation with anyone; it does mean that we should reject foreign legislation.

Jesper said...

Have they found a way to have made the EBA both independent of the ECB and part of the ECB?

It will be argued that in a time of crisis then the executive, the EBA (reporting to/under the governing council) and the governing council, will need to act quickly.

There is a risk that as long as the EBA is within the ECB then it will be under the control of the ones controlling the ECB - the governing council. Non-euro countries have no representatives on the governing council.

christina speight said...

There is no way, with London being by far the biggest financial centre in Europe that any voting arrangement short of a UK veto power could be made "to fit" It's like being an Ugly Sister to Cinderella and trying on the glass slipper.

We should stop playing these games at all or any hope of our recovery will be permanently dashed.

Jesper said...

It seems like it might be the same story as with the fiscal pact....

Sweden appears to sign off on anything as long as the it does not apply to Sweden. Fiscal pact and now it seems likely that the EBA will get the same treatment.

Will vetoes be used and/or another inter-governmental agreement for the EBA?

The sad thing is that Swedish negotiators don't seem to realise that if Sweden ever were to join the euro then the rules and institutions that Sweden does not like will apply to Sweden. Short-termism in politicians isn't unexpected and the ones currently in charge at the moment are certainly likely to ignore any and all long-term effects of their actions and decisions.