Interview with Karel Lannoo, CEO of CEPS
Banking supervision: ECB becomes the authority
By Manon Malhère | Monday 09 July 2012
At the request of eurozone member states, meeting in conjunction with the European Council, on 29 June, the Commission will soon present legislative proposals to establish a “single supervision mechanism” for banks. The Council is asked to study them before the end of the year. This advance towards banking union (alongside integrated deposit guarantee schemes and banking resolution systems) will not be easy. The Commission’s proposals will be based on Article 127(6) TFEU, which requires unanimity by the 27. The only certainty is that the European Central Bank will play the central role of single supervisor. Karel Lannoo, CEO of the Centre for European Policy Studies (CEPS), sheds light on this single banking supervision.
What does single banking supervision mean?
It means that there will be a single banking supervisor: the ECB. For now, these institutions report to several national supervisors. This single supervisor will be European and will therefore not take any politicised or national decisions, which means that there should no longer be any hidden information. I think that the ECB insisted on being given this task because it can no longer provide liquidity to national systems without obtaining information on banks’ health. In exchange, it will have greater responsibility.
That is to say for hidden information?
Look at the second stress test on banks in July of last year, presented by Commissioner Michel Barnier and the Chair of the European Banking Authority (EBA), Andrea Enria. Barnier announced the results with a certain degree of triumphalism, but now we wonder how such results were possible. The list of banks was the longest for Spain. Bankia was on the list and they saw nothing!
What banks would be targeted by this supervision?
The ECB will be more concerned with large and mid-sized banks than with small ones. Large banks like Deutsche Bank, BNP Paribas, Santander or UniCredit should be pleased because they will have only one supervisor. There will be just one rule and just one form of compatibility. Naturally, they are aware that there will be fewer loopholes. But it has mainly been mid-sized banks that have used these loopholes. Large banks are more subject to international market rules and cannot really hide at national level. A bank like Bankia is much less closely followed than banks like Deutsche Bank or BNP Paribas.
This supervision will be intergovernmental…
Yes, the Commission has to present proposals [which the Ecofin Council will adopt] but supervision will go through the ECB, so this is not an internal market measure. We already have a European Central Bank system (ECBS) and now we will have a European banking supervision system.
Can the Commission propose to strengthen the powers of the EBA to bring states that are not members of the eurozone into this supervision?
The Commission can indeed strengthen the EBA’s powers, especially because it is very keen on safeguarding cohesion in the single market. I think that the EBA is going to focus on regulatory and technical tasks and on its role of mediation between the different supervisors but chiefly along the lines of eurozone countries (with a single supervisor)/non-eurozone countries (separate national supervisors).
It would be difficult for the EBA to carry out supervisory tasks…
The EBA is under the Commission’s responsibility and the Meroni ruling (1958) has to be kept in mind, as it still sets a precedent: the Commission may not delegate tasks it does not itself carry out, supervision for example (reserved to national authorities). That is why the Commission’s legal services have closely reviewed existing regulations on the EBA, to be certain that this ruling is not invoked, especially by the British. If you look at the current text, the authority is active chiefly as a regulator and much less as a supervisor. With Article 127(6) of the treaty, which explicitly states that the ECB may have supervisory tasks, the Meroni ruling will not apply.
Will the ECB really have the means to carry out supervision?
To have clout with national authorities, it has to have authority. The EBA does not really have this power, but the ECB does. It will say: no information, no liquidities. The question of conflicts of interest is often raised so as not to merge the monetary policy task with that of banking supervision. But the information argument outweighs the counter-argument of conflicts of interest.
How should this supervision be implemented?
The final supervisor will have to be determined. This may be ECB Vice-President Vitor Constancio. It will have to be clear that Constancio has the task of banking supervision while Mario Draghi handles monetary policy. This distinction will have to be clear.
Existing regulations will also have to be adapted to indicate that the supervision authority in the eurozone will be the ECB under horizontal regulations. That’s a huge job to get done in six months. The Commission also wants to move towards maximum harmonisation but there are still extremely important exceptions, on mortgage legislation [being negotiated by the Council and EP] for example, where I think the ECB will ask to apply one set of rules at European level.