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Banking and finance April 30, 2013

The challenge of establishing the ECB as the regulator of European banks

Few decisions have triggered as much controversy as the EU summit decisions in June and December 2012 to establish a banking union.

Supporters see it as an effective way to take control of the systemic consequences of sovereign and bank debt; opponents warn of an extensive collectivization of risks at the expense of taxpayers and depositors across Europe. Yet, how should a single supervisor for Eurozone banks be designed to make it a stable and sustainable basis working toward the creation of a banking union?

The frequently voiced, long-term goal of establishing a banking union is to solve a key challenge of the current debt crisis in Europe, namely the close links between banks and states. The least controversial element toward a banking union is the establishment of a regulatory body. Much more critical is the issue of where and how it should be established. The decision to allocate the banking supervision to the European Central Bank (ECB) has been heavily criticized because the ECB’s role and independence could be jeopardized. Nevertheless, the ECB has been chosen, probably also because of time pressure. Still, the principle should be clear: the ECB’s supervision of banks cannot have any influence on monetary policy, just as monetary policy cannot impact banking supervision. Both of these features have to be clearly separated.

Upon closer examination, doubts grow as to whether this principle can be maintained, among other reasons, because it causes in the position of the deputy an overlapping of responsibilities for monetary policy and banking supervision. Because each member has one vote it could be that in cases of decisions with possible fiscal consequences, the weighting of votes does not adequately reflect these consequences. Overall, the description within the proposal for a single supervisory mechanism as to how the ECB should uphold its independence is too general. Similarly, the arbitration committee’s operations are too unclear. It is imperative that these points are detailed comprehensively.

The intended division of labor between national and international bodies, however, is a welcomed step. It supports the fundamental criticism that the ECB currently does not have the operational expertise and capacity to oversee all banks in the Eurozone. For this reason, it is necessary to involve national supervisory authorities to ensure that all member states adhere to uniform standards in the mammoth task of implementing a banking union within the Eurozone.

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