Tag: EU

The Single Banking Supervisor: A giant’s step towards a genuine EMU?

Andrea Redondo
LL.M in European Law and Economic Analysis, College of Europe; BSc Economics and Finance, LSE; LLB, Université Paris 1 Panthéon-Sorbonne and Universidad Complutense of Madrid

 

Introduction

On 5 December 2012 a report signed by Mr. Van Rompuy (President of the European Council) in close collaboration with Mr. Barroso (President of the European Commission), Mr. Juncker (President of the Eurogroup) and Mr. Draghi (President of the European Central Bank) was issued, which outlined the steps to be adopted to tend towards a genuine Economic and Monetary Union (“EMU”).[1] The publication of this report marked the beginning of a new era for the EMU.

Shortly after, on 13 December 2012, the Council of the European Union agreed on its position on two proposals aiming at establishing a single supervisory mechanism (“SSM”) for the oversight of credit institutions. The first was a Proposal for a Council Regulation conferring specific tasks on the European Central Bank (“ECB”) concerning policies relating to the prudential supervision of credit institutions.[2] The second proposal aimed at amending the existing Regulation establishing the European Banking Authority (“EBA”).[3] This has been seen as a landmark event in the European construction and Commissioner Barnier has even gone as far as qualifying this as an “historical agreement”.[4]

The intention was to have the package voted by the European Parliament by the end of 2012 or beginning of 2013. For a series of reasons – of which some are more legitimate than others[5] – this vote has been delayed. It is however interesting to analyse at this point in time what the content of the proposal is and some questions which come to mind when reading the proposal, in the hope that some – if not all – will be answered by the time the final texts are adopted.

 

The content of the proposal in a nutshell

The purpose of the proposal is to establish a SSM, thereby:

“[conferring] on the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions, with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the EU and each Member State, with due regard for the unity and integrity of the internal market”.[6]

The ECB is expected to assume its supervisory tasks on 1 March 2014 or 12 months after the entry into force of the legislation, whichever is later.[7]

The main criteria for a financial institutions to fall under the ECB’s supervision is thus that it is systemic or, as the proposal states, that it is “significant”. The assessment of the significance of financial institutions is carried out on the basis of three criteria: (i) size; (ii) importance for the economy of the EU or any participating Member State; and (iii) significance of cross-border activities.

On the basis of these criteria, a financial institution is thus considered significant if the total value of its assets exceeds €30 billion, if the ratio of its total assets over the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below €5 billion), or if the national competent authority considers that the institution is of significant relevance and the ECB confirms this following an extensive assessment. Furthermore, financial institutions which have requested or received public financial assistance directly from the European Financial Stability Facility (“EFSF”) or the European Stability Mechanism (“ESM”) cannot be considered less significant.[8]

It is expected that around 150 credit institutions will fulfil these alternative conditions and will thus fall under the prudential supervision of the ECB.[9] However, although 150 might sound like a large number, there are two very notorious categories of credit institutions which are clearly missing.

The first one is that composed by the credit institutions of the City in London. The reason underlying this exclusion is that the UK (together with Sweden and the Czech Republic) has managed to keep its own credit institutions aside from this proposal. The second category is that composed by the Sparkassen, the German local savings banks, which escape the ECB’s prudential supervision given that Germany managed to negotiate thresholds sufficiently high for these savings banks to fall out.

The proposals also states that:

“[on 29 June 2012] the Euro area Heads of State or Government Summit pointed out that when an effective single supervisory mechanism is established involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly which would rely on appropriate conditionality, including compliance with state aid rules”.[10]

Although this idea is only contained in a small paragraph within a 73-page document, its importance is clearly inversely proportional to its size. Although the direct recapitalisation of banks by the ESM is not yet a reality as it requires a decision of the Council to become operational, if it is finally adopted it will have a great impact on Member States’ public finances.

Amongst other reasons, one of the advantage of this system over the current system whereby the ESFS/ESM facilitate the funds to national treasuries which subsequently recapitalise national banks themselves is that the funds being transferred to banks will not come to increase Member State’s debt-to-GDP ratio as the funds will be perceived as coming from a different legal entity, the ESM. This is a very important fact as it will allow cutting the existing vicious circle between sovereigns and banks, something which has greatly contributed to the debt crisis in Europe.

 

Some unanswered questions concerning the proposals

It is undeniable that the Council’s proposals constitute a giant’s step towards a genuine EMU given the extensive powers which are granted to the single banking supervisor. However, the text of the proposal and the various press releases and press conferences that have accompanied it cannot clarify some unknowns which come to mind when reading the proposals. Some of the most flagrant ones are:

  • Why is it to be expected that the ECB will carry out a more precise and careful prudential supervision of systemic banks than national central banks currently do? At the end of the day, it seems that staff from national central banks is going to be transferred to Frankfurt, which entails that it will most likely be the same people carrying out the supervision of the same credit institutions, but simply from a different geographical location.
  • Is the “two-speed” supervision that the proposals are establishing desirable for the European credit sector itself? It is not difficult to imagine a situation where clients, considering that their interests are better protected when the supervision is carried out by the ECB than by national central banks, will transfer their savings to systemic institutions, leading to the disappearance of smaller credit institutions, thereby leading to a higher market concentration, which can have pernicious competition effects.
  • What implications will this have for the IMF and its financial intervention in Eurozone countries? Will the IMF be entitled to give instructions to the ECB on how to conduct its prudential supervision as it current does to national central banks having received financial assistance from the IMF? A well-thought answer is to be provided to this question if we do not want to see muddy relations within the Troika.
  • Although the proposals foresee a common backstop loss mechanism (the ESM), why does it not contain a common “safety net” for depositors, which is equally important and necessary for a genuine EMU to exist?[11] There won’t be a fully-fledged EMU until such mechanism is put in place in the EU.
  • When bank recapitalisations are carried out by Member States, State aid rules apply. But what will apply when the recapitalisation is done directly by the ESM? Wouldn’t there be a conflict of interest between the ESM’s underlying goal of maximising the returns on its loans and the purpose of State aid rules of limiting distortions on competition? It is to be expected that it will be broadly in line with the rules contained in Articles 107 and 108 TFEU but, what if it doesn’t? Could such decisions be challenged before the Court of Justice?

Conclusion

The two proposals of the Council are certainly to be seen as a giant’s step towards a genuine EMU as the SSM is undoubtedly a central instrument of any decent monetary union. However, and although many unresolved questions arise, there are two main things which are to be regretted: first, that not all Member States subscribed to this initiative (thereby further fostering a two-speed EU) and, second, that the proposal does not cover all the necessary instruments for a fully-fledged monetary union to exist (in particular, the common safety net for depositors is clearly missing[12]). We are therefore facing another clear example of what Robert Schuman had in mind when proclaiming that “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements (…)”.[13] The EMU is therefore no exception to this sequential nature of the EU construction, which needs to take another giant’s step to get to a truly genuine EMU.

[2] Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions: http://register.consilium.europa.eu/pdf/en/12/st17/st17812.en12.pdf

[3] Proposal for a Regulation of the European Parliament and the Council amending Regulation (EC) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards its interaction with Council Regulation (EU) No…/… conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions: http://register.consilium.europa.eu/pdf/en/12/st17/st17813.en12.pdf

[4] “Accord historique superviseur!”, see Commissioner Barnier’s tweet of 12 December 2013 on https://twitter.com/MBarnierEU

[5] Some of the most important reasons lying behind the delay in the vote of the proposal include the uncertainty surrounding the elections in Italy, the recapitalisation of Spanish banks and, more recently, Cyprus’ bailout.

[6] See Article 1, paragraph 1 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[7] See Article 27, paragraph 2 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions. However, given that the vote of the text by the European Parliament has not yet taken place, it is unlikely that the entry into force will occur before April or May 2014.

[8] See Article 5, paragraph 4, (a) and (b) of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[9] A fortiori, all other credit institutions remain under the supervision of their respective national central banks.

[10] See whereas number 8 of the Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions.

[11] The system currently in place obliges Member States to guarantee individually €100.000 per depositor and per entity in case of bankruptcy of the credit institutions where funds were deposited.

[12] There is currently a proposal on the harmonisation of national deposit guarantee schemes, which includes provisions to ensure that sufficiently robust national deposit insurance systems are set up in each Member State. However, even if the report entitled “Towards a genuine economic and monetary union” states that “a rapid adoption of this proposal is important”, it is not clear when this proposal will be adopted, although it seems highly unlikely that its adoption will take place before June 2013.

Nationalism and the European project

Nikolay Domanov

LLM, MA in International Relations, Sofia University; Post-Graduate Diploma candidate in EU Competition Law, King’s College London
 

An idea with tremendous potential, a clear vision and huge emotional discharge emerged six decades ago in Europe – the creation of a Union which can bring piece and prosperity to the peoples of Europe. Unfortunately, 60 years later, this idea has yet to be accomplished.

European integration was conceived mainly as a continuous process. Communities were created not to solidify the status quo, but to create the foundations for the future development of the Continent and for the achievement of specific objectives; at first, economic, and, later, political.

For almost any political analyst it is clear that the EU needs further reforms, a much stronger economy, needs to protect its own integrity. However, the primary question that remains is: what does the EU actually need protection from? The answer appears to be it needs protection from itself. In the current economic environment it became clearer than ever that, in fact, it is the Union’s economy and the unity of its enduring diversity that are in deep crisis.

The global economic crisis set a special course for the whole European project. The current economic problems of the European citizens increased their skepticism of a unified European Union. This has resulted in yet another crisis of confidence in the European institutions, the increase of democratic deficit and the revival of concern over nationalism in Europe.

Under the Lisbon Treaty the EU was supposed to be politically and, thus, economically stronger. Indeed, the Lisbon Treaty is a good starting point as well as an inevitable phase in the integration process. According to its provisions, EU institutions enjoy greater powers: the European Council became grounded as a formal institution[1]; the European Parliament expands its powers[2] in terms of law making, scrutiny, budget, constitutional and foreign affairs; the meetings of the Council of Ministers, when it passes law, shall be public[3]; the Community method is now extended into the area of freedom, security and justice[4]; and the Charter of Fundamental Rights has become legally binding[5].

However, despite all these new provisions, it seems that recently the gap between the so-called “eurosceptics” and the “eurooptimists” has grown even bigger. It was ironic that it was the negative outcome of French and Dutch referendums on the draft Constitution of Europe that held back the Union’s integration aimed to overcome exactly those emerging nationalist ideas. And it shall be made clear that the EU needs further reform, mainly due to the fact that in many ways the present system is opaque and exhausted. This, however, means that the Lisbon Treaty lacks the potential needed to meet all of the current requirements raised by the ongoing social, economic and political events.

In these extraordinary times, instead of speeding the integration process Western democracies worried about their own future have felt the need to slow down Integration by introducing questionable mechanisms jeopardising EU fundamental freedoms.

Genuinely worried by the “Polish plumber”[6], and later by the cheap labour force coming from ethnic minority workers (mainly from Eastern Europe), the old EU Member States have felt the need to firstly limit access to their labour markets secondly to their systems of social insurance, and finally to their borders. The recent requests for partial reintroduction of border control within the Schengen area again raised the issue of how fragile the Union is. Moreover, this threat was not a minor one but against one of the fundamental freedoms and ultimate goal of the Union: the free movement of people and goods.

Following the Greek debt distress, the expulsion of Roma from France, the refugee waves to Italy and even the creation of a double standard in the attempts of Bulgaria and Romania to join the Schengen area, everyone in Europe realised that the European integration model is in deep crisis. And this crisis goes far beyond the democratic deficit against which the European bureaucrats felt very comfortable to fight. As a result, four critical areas in EU policy have been recognised: the massive migration flows from the periphery to the centre of the Union, the loss of national sovereignty and identity, Islamization and the problems with the Roma minority.

In this complex socio-political climate of economic shortages, the far right political ideas seem to have become a gathering point for many. The social contract upon which the EU was founded has been weakened by the ongoing economic crisis, and this led to the emergence of various nationalist parties across Europe, which have been trying to promote their own understanding of national identity and thus endangering the European project.

According to different analysis, nationalists’ concerns in the East and in the West are quite different. In Eastern Europe, on one hand, the main issue is believed to be the presence of ethnic minorities, especially Roma, and the negative consequences of their cheap labour. The Western world, on the other, seems to have created a bias against certain religions given the terrorist attacks that have occurred in the last century. As a result many nationalist parties claim that the foundations of Europe lie within Christianity only and thus other religions’ traditions and beliefs are said to be incompatible with the ‘European idea’.

Nationalist parties claim that the excessive granting of various rights to minority groups is actually incompatible with the principles of the ‘welfare state’ and it destroys its foundations. ‘Sweden Democrats’, for instance, claim that the welfare state is at risk of extinction because of the migration flows, while ‘Attack’ in Bulgaria criticise ethnic and religious minorities in the country for having too many privileges.

As a general rule, all nationalist parties feel that governments transfer too much sovereignty to the EU. That’s why some nationalist parties see the withdrawal of EU membership as the solution to all problems. For example, organisations such as the Freedom Party in Austria and the Danish People’s Party have repeatedly demonstrated opposition to EU accession and its enlargement, while the Swiss People’s Party seeks to keep the Union out of Switzerland. However, other parties find EU membership acceptable, but reject its future enlargement. For these parties, the accession of Turkey, a Muslim country of 74 million people, is a major argument against EU future enlargement.

Despite the bitter experience of World War II, some countries have a lasting tradition of supporting nationalist groups. Switzerland is a good example of this. In the last federal election nationalist parties collected an average of 28 percent of the vote, and Swiss People’s Party is the leader. ‘National Front’ in France has received approximately 14 percent of the vote in the last three presidential elections. Similar results can be observed in other countries such as the Netherlands, Austria and Denmark. Finland can be recognised as the state in which the support of the nationalist parties had the highest growth in the last two electoral campaigns. Further, participation of nationalist parties in the government under some form can be seen in countries like Italy, Hungary and Bulgaria.

It is worth pointing out that recently a very interesting phenomenon can be observed. As a general rule it is the mainstream parties that usually control the executive branch in the country. With the emergence of nationalist parties, however, support for mainstream parties has decreased and it is not as easy as it once was for them to build powerful majorities in the national and regional parliaments. It turns out that these established parties have to cooperate and comply with the requirements of the small (often the nationalist right-wing) parties in order to be able to maintain their participation in the government. This trend could turn out to be very dangerous in the near future, not only for the Member States, but for the EU as a whole.

To determine the future of the nationalist parties is as difficult as to determine the future of the EU itself. The fact is that the more difficulties the European integration process encounters, the more popular the nationalist alternatives will become.

For the federalists it is clear that the future of the EU lies far away from the nationalist ideas as they strive for a truly federal state capable of solving all current problems. In a federal union the present inter-institutional balance shall be changed; a bicameral parliament shall be established comprised of the European Parliament and the Council of Ministers with a true executive body: the Commission; and a real European Court. In terms of finance, the EU treasury and European Monetary Fund shall be established. These innovations will clearly dissolve many of the current economic and political problems the EU is facing. However, the national sovereignty issue will remain. This could only be overcome by introducing a truly European political space where the EU dimension of politics is presented at a national level.

It is clear that the prospect of successful European integration is a desirable goal. A federal Union is one of the proposals for a possible development of the European Project, but there may also be others that have yet to be seen. However, nationalism is definitely not one of them.

[1] Article 13, paragraph 1 of the Treaty on European Union.

[2] For further reference see Article 14 of the Treaty on European Union and Articles 223-234 of the Treaty on the Functioning of the European Union.

[3] Article 16, paragraph 8 of the Treaty on European Union.

[4] For further reference see Articles 67-76 of the Treaty on the Functioning of the European Union.

[5] By virtue of the first subparagraph of Article 6(1) of the Treaty on European Union.

[6] This was a phrase used as a symbol of cheap labour coming in from Central Europe as a result of the Directive on services in the internal market during the EU Constitution referendum in France in 2005. It was first used by Philippe Val in Charlie Hebdo and later popularised by Philippe de Villiers