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”). 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. The second proposal aimed at amending the existing Regulation establishing the European Banking Authority (“EBA”). 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”.
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 – 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”.
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.
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.
It is expected that around 150 credit institutions will fulfil these alternative conditions and will thus fall under the prudential supervision of the ECB. 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”.
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? 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?
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). 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 (…)”. 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.
 Towards a genuine economic and monetary union: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/134069.pdf
 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
 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
 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.
 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.
 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.
 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.
 A fortiori, all other credit institutions remain under the supervision of their respective national central banks.
 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.
 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.
 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.
 The Schuman Declaration – 9 May 1950, available here: http://europa.eu/about-eu/basic-information/symbols/europe-day/schuman-declaration/index_en.htm