Berlin and Brussels at odds over ECB powers

Wed, Sep 12, 2012, 01:00

THE EUROPEAN Commission is proceeding with a plan to give the European Central Bank sweeping new powers to supervise as many as 6,000 euro zone banks, an initiative Germany is resisting on the basis that it is too unwieldy.

Draft legislation from the commission today will have a crucial bearing on Ireland’s campaign for bank debt relief as EU leaders have resolved that the direct recapitalisation of banks by the ESM fund cannot go ahead until the new supervisor is up and running.

This condition was set because EU leaders want to reassure doubters that any stricken banks rescued by the ESM are subject to robust supervision.

By toughening the external oversight of such banks, the leaders also want to avoid a situation in which the ESM finds itself on the hook for further losses after any capital infusion from Europe.

The commission and Germany are at odds over the scope of the plan to give the ECB new supervisory powers, raising doubt as to whether new laws can be enacted by the end of the year as the commission and EU leaders wish.

Despite some tentative signs that both sides may be open to compromise, numerous legal and political hurdles remain to be overcome in an ambitious timeframe.

Germany says the new regime – for practical reasons – should apply only to the 25 largest systemically important banks in the euro zone but the commission says this stance is riddled with weakness.

Although Berlin insists it has a “huge interest” in ensuring the success of the new regime, officials in Brussels say its position conveniently gives it scope to maintain national supervision over its state-owned Landesbanks.

German sources query the feasibility of recruiting the large numbers of staff required to run the planned system. They also say the “technical unification” of rules applying to 6,000 banks in different jurisdictions presents a serious challenge.

“Germany has 1,500 people working in banking regulation alone. With a 25 per cent stake in the euro zone, that gives an idea of the personnel we’ll need,” said a senior German source.

“This regulator has to be effective. We have no interest in creating a nice law that doesn’t work.” But the commission says it is essential for the ECB to exercise its new powers over all banks.

Central to its argument is the fact that crippled banks like the former Anglo Irish Bank were not deemed systemically important before the crisis but soon proved to be, at huge cost to taxpayers.

The commission is also likely to say today that a two-tier system – in which a small group of banks is subject to direct ECB supervision while most others are not – would be inherently unstable.

One key concern it may highlight is the threat of deposit flight within countries to banks perceived to be safer because they are subject to ECB supervision. This would increase the risk of volatility, the opposite of what the new system seeks to achieve.

These divisions and others pit Germany’s finance minister Wolfgang Schäuble against EU internal markets commissioner Michel Barnier, who is responsible for having the law enacted. At the same time, the two sides may not be as far apart as it might seem.

The commission will propose a phasing-in period in which the ECB would decide from next January to assume full supervisory responsibility over any bank, particularly any institution that has received state capital in a euro country.

On the face of it, such rules could be applied to speed up the direct recapitalisation of the surviving Irish banks. There is no agreement yet, however, on how to proceed with such debt relief.

In the commission’s plan, all banks of major systemic importance would be put under the ECB’s supervision from July. The new regime would apply to the remaining banks from January 2014.

The introduction of the legislation will clear the way for horse-trading with Germany over the scope of the initiative. It may well be open to a staggered implementation of the new regime, but diplomats and officials agree that consensus will be very difficult to achieve.

The commission will say today that the division of labour between the ECB and national regulators may vary according to the size of banks. That too presents a clutch of technical issues.