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Banking deal struck

December 16, 2012

Published in New Europe Online

Banking deal struckAfter several months of proposals, counter-proposals, consultations and negotiations, a deal was struck on 13 December in Brussels on EU “banking supervision.” The agreement was praised by all governments officials, including the eurosceptic British Chancellor of the Exchequer, George Osborne

, who said that the city’s financial independence was preserved.

Although the technical details have still to be worked out, the main features of the agreement are already known. First, it concerns only the 150 biggest European financial institutions (as Germany had proposed), but can be extended to cover any other of the 6,000 banks of the continent, in case of complaint (as France wanted). Secondly, it primarily covers Eurozone banks, but non-euro member countries can also participate on a voluntary basis.

Banking supervision for the big “systemic” banks is delegated to the European Central Bank (ECB), while the smaller banks will be monitored by their local central banks. Under the agreement, which will enter in force in March 2014, a resolution authority and a bank guarantee scheme will have to be established. In case of problem, the resolution authority (and not the local central bank) will have the responsibility to decide whether a bank should be put in liquidation, or should be recapitalized. Most importantly, recapitalization will be occur through the European Stability Mechanism (ESM), the EU rescue fund, an institution that currently holds 500 billion euro assets. Interestingly, the bailout funds will be not be tax-payer money, but contributions of the same commercial banks participating in the scheme.

Although, the agreement is a decisive step towards European integration and monetary stability, several bank officials have raised questions about the effective functioning of the mechanism. For instance, Jens Weidmann, the head of the German Bundesbank, was puzzled about ECB’ s capacity to effectively supervise such a big number of commercial banks “For practical reasons, one could have drawn the circle of systemically relevant banks a little bit tighter,” he said, and he also doubted that the ECB Governing Council is the ideal body to decide whether a bank should be closed or not.

As a matter of fact, it is really challenging for the ECB to establish within a period of only 14 months, an efficient monitoring mechanism even for the 150 EU big systemic banks. The issue will be even more difficult, if to the “regular” supervision, one adds the smaller bank cases, brought to the attention ECB.

In any case, the agreement is a leap forward for the stabilization of the common currency, and brings the Eurozone one step closer to a real union.


From → Views & Opinions

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