A Primer On Europe's Common Bank Supervisor

The Eurozone was once again engaged in burning the midnight oil, in yet another futile endeavor, this time setting the stage for a common bank supervisor in the face of the ECB, which is somehow supposed to "regulate" Europe's thousands of banks. That this was a total practical dud can be seen in the response of the EURUSD to the news. However, for those interested in the theoretical nuances, whose actual implementation has once again been kicked into the future, here is a quick and dirty primer from SocGen.

Europe agrees single bank supervisor

EU Summit to focus on further steps towards banking union

European finance ministers finally hammered out a series of compromises to agree the terms for a common bank supervisor in another marathon session that extended into the early hours of Thursday morning. Under the agreement, the ECB will supervise banks with asset values of over €30bn or 20% of their home country’s GDP. The agreement is expected to be finalised by March 2013, and the new Single Supervisory Mechanism will start to become operational in March 2014. The agreement effectively clears the decks for the EU Heads of State meeting today to focus on the next steps toward a European Banking Union.

ECB to supervise European banks

Under the agreement, the ECB will have direct responsibility for banks with assets of more than €30bn, or representing more than 20% a country’s national output. This definition leaves most of Germany’s savings banks under the control of German national authorities. Every euro area country will have at least three banks directly supervised from Frankfurt. However as part of the compromise, the ECB retains the power to intervene in any bank and deliver instructions to national supervisors. The SSM will be composed of the ECB and national competent authorities. The ECB will be responsible for the overall functioning of the SSM. Under the proposals, the ECB will have direct oversight of euro area banks, although in a differentiated way and in close cooperation with national supervisory authorities. Non-euro area member states wishing to participate in the SSM will be able to do so by entering into close cooperation arrangements. Pierre Moscovici, the French finance minister, expressed his approval for what he said was a “good working balance”.

Direct recapitalisations by the ESM unlikely before 2014

However, Germany also won concessions on the timing of implementation, so that no fixed deadline is included in the text for the ECB to take direct oversight of the biggest banks.  There remains, however, a series of specified goals meaning the system could be up and running by March 2014. As such, Wolfgang Schäuble, the German finance minister, madeplain that one of the key purposes of the reform – to allow the ESM to directly recapitalized banks – was out of the question until well into 2014. “Again and again we have created expectations we cannot fulfil and that is very dangerous. We should be modest,” Mr Schäuble said, in a clear warning to countries that regard the creation of a central supervisor as a stepping stone to more risk-sharing. However, again reflecting the spirit of compromise, other leaders stressed that existing rules already allowed direct recapitalizations to take place so long as moves were subject to unanimous approval. The new supervisory mechanism should be fully ready by 1 March 2014, with about 200 banks automatically qualifying for direct ECB oversight, EU Financial Services Commissioner Michel Barnier, said at the press conference following the agreement. In the interim, the ESM could aid banks directly, using its own procedures and asking ECB supervisors to step in, he said.

Euro area ‘outs’ win double majority argument

Beyond agreement amongst euro area members, the other major point of friction was over the rights of non-euro area countries. Euro area countries eventually dropped their objections to UK-led demands for a “double majority” principle at the European Banking Authority while a series of provisions was also included in an attempt to address the legalrestrictions that prevented non-euro area members of the banking union holding full voting rights within the ECB. However, these proved insufficient for Sweden and the Czech Republic, which made clear they would not join the banking union in the near future.

Monetary policy decisions to be separated from supervision within the ECB

The ECB's responsibility for monetary policy is to be strictly separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision. To achieve this, a supervisory board responsible for the preparation of supervisory tasks would be set up within the ECB. Non-eurozone countries participating in the SSM would have full and equal voting rights on the supervisory board.

The board's draft decisions would be deemed adopted unless rejected by the ECB Governing Council. National supervisors would remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. The EBA would retain its competence for further developing the single rulebook and ensuring convergence and consistency in supervisory practice.