European Union financial supervision proposals will call for the European Central Bank to oversee all euro-area banks to prevent lenders from pitting one regulator against another, according to a document obtained by Bloomberg News.
Making the ECB responsible only for so-called systemically important banks “could lead to instability and distortions of competition as depositors and lenders move from one tier to the other to take advantage of the more uneven supervisory environment,” according to the document, which was prepared for a meeting of national finance ministry officials.
The new system should be a “network” in which national regulators operate under the authority of the ECB, according to the so-called issues note, which was prepared by officials on the EU’s Economic and Financial Committee.
Euro-area leaders in June decided to create a common bank supervisor and beef up the ECB’s oversight role to pave the way for direct bank bailouts from the single-currency area’s firewall funds. The euro region’s debt crisis, now in its third year, has forced Ireland, Greece, Portugal and Cyprus to seek broad-based aid, while the Spanish government was granted as much as 100 billion euros ($126 billion) to recapitalize its beleaguered banking system.
EU taxpayers have provided 4.5 trillion euros in capital injections, guarantees and other forms of support to their lenders since the 2008 collapse of Lehman Brothers Holding Inc., contributing to the weakening of public finances.
“Restricting ECB supervision to systemically important banks would leave the German Landesbanken, the Spanish cajas and the like to clearly inadequate domestic supervisors -- and it was these banks that are mainly responsible for the European financial crisis,” Richard Portes, professor of economics at the London Business School, said by e-mail.
The new supervisory system should “enter into force as soon as possible” so that the euro area’s bail-out funds can be empowered to directly recapitalize banks. There is an “urgency” to set up a single supervisor, the document says.
The plans may also include changes to “voting arrangements” in the European Banking Authority to prevent non- euro area countries from being marginalized in its decision making, according to the document.
The London-based EBA drafts technical standards for bank regulation that apply across the EU. It also has some power to settle disputes between regulators.
A European Commission spokesman didn’t have immediate comment when contacted by Bloomberg News. The commission plans to unveil its proposal on Sept. 12.
The EU’s supervisory proposals will call for a separate, stronger set of accountability procedures for the ECB on bank supervision than the central bank uses for its monetary policy decisions, according to the document. Monetary policy and bank oversight would take place on different tracks, even though the ECB’s Governing Council would have “ultimate responsibility” for the bank’s operations.
ECB President Mario Draghi didn’t discuss the central bank’s future as a bank supervisor during his monetary policy remarks today. He said the ECB agreed to an unlimited bond- purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.
The EU will also seek for the new supervisory system to be underpinned with a single regulatory rulebook for banks that should apply across the bloc’s 27 nations.
The system “cannot work with different national prudential rules,” according to the document.
The creation of a “European deposit guarantee and resolution fund” may also be envisaged to give the single supervisor the financial “wherewithal” to tackle crises.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.