Financial services

Peter Spiegel

Outgoing Cypriot president Demetris Christofias addresses the European Parliament Tuesday.

In this morning’s dead-tree edition of the FT, fellow Brussels Bloggger Josh Chaffin has a report on Cypriot officials launching an offensive to convince other eurozone governments that it is no longer a haven for money laundering.

The effort has included summoning EU ambassadors in Nicosia to the Cypriot finance ministry, where they were given a 23-slide presentation detailing the country’s anit-money laundering efforts. As is our practice here at the Brussels Blog, we’ve decided to post a copy of the report hereRead more

Jonathan Faull, EU Commission's director general for internal market and services

Today’s instalment of the FT series on banking union turned to Britain and its troubled relations with the EU on financial services. We quoted Jonathan Faull in that piece, who runs the European Commission department overseeing the banking union plans.

He is British to boot and as close as it comes to a Brussels celebrity, so we thought it would be worth publishing our entire Q&A since he has some strong views about Britain’s role in the EU. Note the questions were partly intended to provoke; Faull characteristically kept his cool.

1. Are the views of Christian Noyer, the French central bank governor, compatible with the single market? Would the Commission stop the eurozone forcing most euro business to be within the euro area?

The EU’s financial services policy and legislation are for the whole single market, except for specific measures for the banking union being developed for the eurozone and volunteers among other EU countries. No banking union measures will discriminate against non-participating member states. The EU treaties are binding on all members and do not allow discrimination on grounds of location of business within the EU. What happens “naturally” as markets develop is another story. London has to compete!

2. Are there any genuine UK safeguards against the power of the banking union that would not fragment the single market? What are the dangers if the UK is not realistic in what it asks for? Read more

This issue has always been a potential dealbreaker: how will Germany’s politically powerful network of small public banks — or Sparkassen — sit under the bailiwick of a single bank supervisor? Until now we’ve mainly seen diplomatic shadow-boxing on the matter. But that fight is beginning in earnest.

As is the custom in Brussels, some ambiguous and unclear summit conclusions are helping spur things along. Chancellor Angela Merkel last week hailed a one particular sentence as a breakthrough for Germany: that the European Central Bank would “be able, in a differentiated way, to carry out direct supervision” over eurozone banks.

To her, that vague language was recognition that the Sparkassen would be treated differently — the ECB would concentrate on big banks and those that are facing troubles, and leave the rest to national authorities. Read more

Tomorrow will mark another milestone in the long meandering path towards a international financial transaction tax, otherwise known as the Tobin tax.

What exactly will happen? Well the European Commission, the EU’s executive arm, will approve a proposal that paves the way for an avande-garde of member states to agree their own Tobin regime. In EU jargon, it’s a proposal authorising “enhanced cooperation”.

Ironically the step forward will come in the shape of a legal admission of defeat, a formal acceptance that there is at present no consensus for a pan-EU levy, let alone enough for a global one.

It is largely a formality. But it means the 11 EU countries that want the levy will be one procedure closer to setting up their own Tobin tax. Such breakaway groups are considered a last resort under EU rules, so any enhanced cooperation must clear various legal hurdles, including proof that a pan-EU deal is impossible for now. Read more

Legal opinions from the top lawyer to EU ministers are not intended for mass circulation. They are usually virtually unquotable, often studiously ambiguous and always highly political. But the Council legal service’s take on the European Commission plan for a single bank supervisor is a classic.

The headline is that the Commission’s supervision blueprint — as announced in September — is illegal in key parts. More important, though, is the detail of the argument and the challenges it poses to finding a diplomatic solution before the end of the year.

Before diving into the argument and quoting key sections, it is worth sumarising and explaining some of the implications. Read more

Peter Spiegel

Germany's Schäuble, left, and France's Moscovici sent the Tobin letters out this morning.

First, it was going to be a global financial transactions tax – known among the cognoscenti as the Tobin tax – agreed by the Group of 20 major economies, but the US wouldn’t go along. Then it was going to be an EU-wide levy among all 27 members of the bloc, but the UK and several Nordics disagreed.

That got whittled down to the 17 eurozone members, but the Dutch and Irish didn’t want it. So, starting today, a final push to find nine EU members who will sign up to the Tobin tax was launched by France and Germany, who sent letters around this morning to all EU finance ministries looking for takers.

Under the EU’s arcane rules, if nine sign up, Paris and Berlin can move ahead with “enhanced cooperation” – essentially a tool that allows a small subset of countries to agree on common policies and still stay within the EU’s legal system. But it’s not certain they’ll find even nine, EU diplomats said.

According to copies of two letters obtained by Brussels Blog – one to the European Commission, the other to national capitals – co-signatories Pierre Moscovici, the French finance minister, and Wofgäng Schauble, his German counterpart, are trying to gain support by arguing the tax is the financial sector’s contribution to eurozone crisis response. Read more

Is it possible to have one supervisor for eurozone banks, while keeping 17 different paymasters for when things go wrong?

It is the big potential problem of phasing in a banking union – while prudential responsibility is centralized under one supervisor, the means to pay for bank failure isn’t. One cynical diplomat likened it to “telling all cars to suddenly change sides and drive on the left of the road – but leaving the lorries to drive on the right.”

Just think through what would happen in the case of a failed financial institution once the European Central Bank takes over supervision.

Under the Brussels banking union plan, the ECB will have the power to shut down the lender by removing its license to operate. But in practice it would require the authorisation of the bank national authority. As we know, some banks perform vital functions for the economy and are too big to fail. For the ECB to pull the plug, someone would have to be available to pay for winding it up or bailing it out. Read more

Planning for a European banking union is racing ahead, in spite of the considerable political obstacles. The vision is for two, five or even ten years in the future. But be in no doubt: the institutional turf war is already afoot.

It was on display today in the pages of the international press. Speaking to the FT Jose Manuel Barroso, the European commission president, laid out his vision of a banking union built on the foundations of existing EU institutions.

At the same time Christian Noyer, the governor of the Bank of France, made his pitch in the Wall Street Journal for eurozone central banks to provide “the backbone of the financial union”.

The clashing views highlight the great unanswered question of the banking union: if power over banks is centralised, who will be given control? Cui bono? These three scenarios lay down the broad templates for a union, and the institutions that would stand to win and lose depending on the outcome.

1. An EU banking union

Broadly as outlined by Barroso. A single supervisor, resolution regime and deposit guarantee fund serving all 27 member states. Should the UK refuse to take part — which it will — arrangements would be found to enable the other members to go forward. This union would cover countries outside and inside the single currency club, but remain within an EU framework.

Treaty change would not be necessary, at least according to the commission. Read more

Peter Spiegel

Madrid police stand guard outside Bankia, the troubled Spanish bank, during a protest Saturday.

In talking to senior officials about plans for a Spanish bailout for our story in today’s dead tree edition of the FT, several steered us to the seemingly overlooked bank recaptialisation guidelines for the eurozone’s €440bn rescue fund that were adopted last year.

Those six pages, available for all to see on the website of the rescue fund, the European Financial Stability Facility, make clear European leaders were contemplating exactly the situation Spain now finds itself in: having done the hard work on fiscal reform, but suffering from a teetering banking sector that needs to be recapitalised.

The important thing to note in the current context is that the EFSF guidelines, adopted after more than a year of fighting over whether the fund should be used for bank rescues at all, allow for a very thin layer of conditionality for bailout assistance if the aid goes to financial institutions – notably, it foresees no need for a full-scale “troika” mission of monitors poking around in national budget plans. That’s something the government of Mariano Rajoy has been demanding for weeks. Read more

Some issues to bear in mind when considering whether a European banking union is a realistic possibility. The difficulties highlighted are not impossible to overcome. But it would be a wrench.

1. Germans don’t like strong EU supervision of their banks. Berlin is fond of federal EU solutions. But it is even more keen on running its own banks. The political links — especially between the state and regional savings banks — are particularly strong in Germany. To date Berlin has proved one of the biggest opponents of giving serious clout to existing pan-EU regulators.

2. Germans really don’t like strong EU supervision of their banks. There is again some wishful thinking about Berlin shifting position. Angela Merkel did say she supported EU supervision. But there were important caveats. She referred to supervision of “systemically important banks” — which is likely to exclude the smaller Sparkassen banks and the 8 Landesbanks. To some analysts, this represents a giant loophole. She also did not explain what kind of supervision. Berlin may only support tweaks to the current system.

3. Germans don’t like underwriting foreign bank deposits. Another pillar of a banking union is common deposit insurance. To Berlin this proposal represents another ingenious scheme to pick the pocket of German taxpayers. A weaker proposal to force national deposit guarantee schemes to lend to each other in emergencies has been stuck for two years in the Brussels legislative pipeline. Most countries opposed it. German ministers say it could be considered, once there is a fiscal union across the eurozone. So don’t wait around.

 Read more

Francois Hollande rather enjoys issuing blood-curdling warnings to the City of London. During the campaign he declared his “real enemy” to be ”the world of finance” and post-election he is not toning down the rhetoric.

How ironic then that Hollande’s first major piece of EU financial regulation will see him largely siding with European banks (and yes, that includes the British ones) against calls from the UK and ECB for tougher rules.

Diplomacy in Brussels can be a funny business. Hard as it is to believe, in this negotiation the big beasts of City banking have been privately cheering on the French. Next week, when finance ministers meet to negotiate a deal, we’ll all be able to see if Hollande changes Paris’ tune. Read more

Peter Spiegel

Belgium's finance minister Steven Vanackere talks to colleagues at the Copenhagen meeting.

Our front page story in tomorrow’s dead tree version of the FT includes lines from confidential analyses distributed to European Union finance ministers at their gathering in Copenhagen. As usual, we thought we’d offer a bit more from the documents here at the Brussels Blog.

Among the most interesting elements in the documents are discussions about Europe’s banks, which have seen a surge in confidence thanks to the European Central Bank’s €1tn in cheap loans, known as LTRO for long-term refinancing operations.

One of the analyses in particular – the three-page “Assessment of key risks and policy issues” prepared by the EU’s economic and policy committee – warns that there are new signs of instability in the European banking sector. Details after the jump… Read more

European regulators embarked on a financial rulemaking binge after the 2008 crisis. Yet the biggest question of all — how do you let a big bank like Lehman Brothers collapse without endangering the entire financial system — remains unanswered. If you think the system was inadequate 2008, it is basically no better today.

A Brussels proposal on “Crisis Management and Bank Resolution” has been promised “in a few weeks” since the summer of 2011. Month after month, the Commission ducked the issue. Today Michel Barnier, the commissioner overseeing financial services, admitted he needed more time for a informal mini-consultation on “timing and calibration”. The odds are surely lengthening on a proposal emerging before the summer. Read more