The powers of the European Central Bank (ECB) over individual banks are set for expansion under plans set to be announced on September 12 by European Commission President José Manuel Barroso – but the question of how much will be another thorny political issue for the region.
European Central Bank
The ECB (CNBC Explains:How Does the European Central Bank Work?) would be able to govern all 6,000 eurozone banks under a plan being drawn up by the European Commission, rather than the more decentralized "banking union" previously discussed with the ECB itself, according to the FT.
“The move towards banking union is an opportunity for eurozone leaders to show the world that they are drawing lessons from the crisis and can streamline their supervisory structures,” Karel Lannoo, chief executive officer and senior research fellow at CEPS, wrote in a commentary examining the plans.
According to the politicians pressing for these new powers, ECB supervision would remove some of the risk from the euro zone, and “break the vicious circle between banks and sovereigns.”
Some grey areas between the ECB and country-specific central banks will be cleared up, like who is in charge of financial stability. At the moment, roughly speaking, the ECB is responsible for price stability and the national banks for financial stability, but the ECB has taken over more and more responsibility for financial stability as the crisis has progressed.
This has led to confusion and dissent over issues like, for example, whether the ECB should intervene in Spain and Italy by embarking on a mass bond-buying program.
Making the Greeks fiscally more like the Germans appears to be an endeavour worthy of Greece’s mythical hero Hercules, and banking union may not solve the problem.
New appointments would have to be made and a separate committee established to the one which currently votes on interest rate decisions.
On the international level, the newly-empowered ECB would probably represent the euro zone on bodies like the Basel Committee and the Financial Stability Board, which might give some clarity of purpose.
The union could also make the ECB more confident about actions like the potential mass purchases of Spanish and Italian bonds to help keep those countries’ bond yields at sustainable levels.
“Banking union consolidates the move towards maximum harmonization, for the EU as a whole. Lannoo said within the euro zone banking union, exactly the same rules should apply, but they don’t because some countries such as the U.K. and Denmark aren’t part of the single currency group.
“Banking union could thus make the euro zone more attractive as a financial center.”
Both the U.S. Federal Reserve and the Bank of England were given increased powers to supervise their national banks during the credit crisis. The ECB has already been given more powers through the creation of the European Systemic Risk Board, an independent but ECB-staffed body.
Questions on how the mergers and acquisitions market for banks could be affected also have to be answered, as there are still differences across the euro zone on issues like company law and shareholder rights.
There is also the issue of how to protect deposits within those banks. There is currently an EU-wide draft Depositor Guarantee Scheme which would protect deposits of up to 100,000 euros, but this would be done on a national rather than pan-European level.
What would happen if one of these banks go bust? There are plans to harmonize bank resolution triggers and procedures for the first time, which would make each country appoint a resolution authority and create a resolution fund. However, there is no Europe-wide resolution authority as a result of this. This is an area where the ECB could potentially step in, and the thought of the EU having more power over which banks fail or succeed is one issue which has politicians in a tizzy.
The ECB has already effectively acted as lender of last resort for some parts of the euro zone banking system through programs such as the long-term refinancing operations – mass liquidity injections. However, this is distinct from full state aid via “emergency liquidity assistance”, such as that given to some Greek banks by the Bank of Greece.
If the ECB was to bail out banks in the worse-off euro zone peripheral economies, the overall bill for the core countries could climb even higher.
There are also cases where, it has been alleged, supervisory central banks have become too close to the banks they govern. The situation around the London interbank offered rate scandal, where a Barclays executive said that he was under the impression that the Bank of England had asked the bank to artificially lower rates, is a case in point. A pan-European regulator might help remove some of these local issues.
Lannoo points out that the ECB itself may have to be supervised more closely by the European Parliament as a result.
“Prudential supervision is performed to maintain financial stability and to protect depositors. Taxpayers’ money may be needed to achieve this stability, which requires accountability before a parliament,” he argued. (Read More: Why ECB Bailouts Won't Be Unlimited)
“Exercising supervision may thus reduce the independence of the central bank, and its accountability will have to increase.”
Written by Catherine Boyle, CNBC. Twitter: @catboyle01
