Subsection 6 of Article 127 of the Lisbon Treaty, which amended subsection 5 of Article 105 of the Maastricht Treaty, has rarely loomed large in the discussions between heads of government at European summits. Perhaps Mario Monti, the eurocrats’ eurocrat, could always have recited it by heart, but it was not much mentioned by François Hollande on the election trail in France. Yet in the small hours of Friday morning it was at the core of the discussions on a future banking union.
The Articles in question relate to the role of the European Central Bank in banking supervision. Their language is opaque, reflecting past divisions of opinion on what the ECB should be empowered to do. In the debates on the Maastricht treaty, some argued that any self-respecting central bank must also oversee the banking system; others strongly resisted the transfer of national competences that would entail. The compromise was an awkward draft, which gave the European System of Central Banks as a whole the task of “contributing to the smooth conduct” of banking supervision, and allowed the Council of Ministers, acting unanimously, to give the ECB itself “specific tasks… concerning policies related to the prudential regulation of credit institutions”, without amending the treaty.
This might be thought a rather fragile legal basis on which to make the ECB the chief supervisor of a fully-fledged banking union. But last week’s summit clearly decided it was better than the other options. The European Banking Authority (EBA) could have been adapted, but it is a small body, which has evolved very recently from a committee of banking supervisors. Crucially, it also sits in London. Keeping it there was one of David Cameron’s “red lines” at the December summit, and a euro area banking supervisor sitting outside the zone would have looked odd, to say the least. If the timetable were more relaxed, the right answer might have been to create a brand new institution, but that would have required a new treaty. So the ECB it is.
Inevitably, there are many details still to be resolved, crucially which banks will be included: all, or just the largest systemic institutions? The Germans are keen to exclude their domestic savings banks, yet following that logic Bankia in Spain would not have been covered by the ECB. The best practical outcome might be a model copied from the Federal Reserve, whereby any bank wishing to operate across borders in the EU would need authorisation from the ECB, while purely national institutions could go to their local authorities. But the ECB would also be able to designate other banks as potentially systemic, as the Fed can do.
Just as important as these questions of scope will be getting the relations right between the ECB and other supervisors. Member states will be reluctant to wind up their national central banks, or non-central bank supervisors, as some have – another complication. And the ECB will take time to build up its hands-on capacity. But the direction of change must be made clear at the outset – the ECB must call the shots.
Another important question to address is the ECB’s accountability. Here the eurozone may usefully look across the channel at the debates under way in the UK parliament about the accountability of the newly expanded Bank of England. It is widely accepted that it makes sense to endow a monetary policy institution with a high degree of independence. Arguably the ECB is too independent for its own good: unlike the Bank of England it defines its own inflation objective. But in any event the accountability for decisions on banking supervision, where property rights are at issue, and taxpayers’ funds may be put at risk, must be different. How will the European Parliament equip itself to do this job? Indeed, is the European Parliament the right body at all, as its influence on potential bailout funds is minimal? There are great risks here for the ECB, if it is not seen to have the right degree of democratic oversight.
Lastly, there is the vital “ins and outs” question. The logic for creating a banking union derives from the single currency. The UK, and others with their own currencies, will not be included. Some of the other “outs” may consider themselves to be “pre-ins”, but they may have to remain in that category for some time, and the UK will certainly not join in the foreseeable future.
So how will this “variable geometry” work? The EBA is still empowered to make rules for the single financial market as a whole. There is so far no proposal to transfer that power to the ECB, which would be highly controversial and certainly opposed by the UK. But will a system where the EBA makes rules for 27, which are then transposed differently for 17, work in the longer term? Will the eurozone come to act as a bloc, with the ECB acting for it? If so, decision-making within the EBA will be lopsided. Most decisions are made through a version of qualified majority voting. If the ECB speaks for 17 the rest, including the UK’s Financial Services Aauthority or the Bank of England from next year, might as well stay at home.
There are therefore some awkward negotiations ahead. In theory, the UK could block the change, which requires unanimity, but to obstruct the whole banking union idea would be seen as a destructive move. It will, however, need some security for its banks within the single market. Arguing for the interests of British banks, and other banks based in London, may go against the grain just now, but the UK chancellor will have to hold his nose and do so – up to a point at least.