'Mixed blessing' as supervision moves closer to Frankfurt

THE REASONS for a banking union and pan-euro zone banking supervisor are clear – before the strong euro area countries pump money from the centre into banks in weak euro countries, they must first be supervised from the centre.

What is not clear is how the supervision will be divided between the European Central Bank and the likes of the Irish Central Bank and the 100-plus staff supervising Irish banks in Dublin.

Yesterday the European Commission published proposals for a single supervisory mechanism that will put the ECB in charge of overseeing banks in 17 euro countries.

While 6,000 financial institutions will be supervised from Frankfurt, the ECB will follow a rulebook developed by the European Banking Authority (based in London), which will oversee regulation in the 27 EU states to protect the European single market.

The Irish banks – namely Bank of Ireland, Allied Irish Banks, Permanent TSB and Irish Bank Resolution Corporation (which is running down the former Anglo Irish Bank and Irish Nationwide) – will be among the first wave of banks to be supervised from Frankfurt.

The commission said the ECB had the discretion to assume full supervision over any banking institution from the start of next year, particularly those which have received or requested state funds.

This in effect means banks in Spain and Ireland, as they are the countries that will benefit first from the euro bailout fund, the European Stability Mechanism.

The systemic or too-big-to-fail banks will be supervised by the ECB from July 1st, 2013, and all other banks from the start of 2014.

Proposals for a common approach to deposit guarantees and resolving failed banks will be adopted by the end of this year.

The creation of the pan-euro zone banking regulator turns the relationship between the European and Irish Central Banks into that of a head office and a branch. Day-to-day banking supervision will remain with the Central Bank but big decisions such as authorising banking licences, stress-testing and early interventions in failing banks will be signed off by Frankfurt, working with Dublin.

The new relationship between national and European central banks was likened to the Irish regulator’s relations with the troika, where the Central Bank supervises with the troika looking over its shoulder, said one source.

A supervisory board will sit below the ECB’s governing council and aside from a chairman, vice-chairman and four ECB officials, each national central bank will be represented by one individual.

Ireland’s representative on the board is expected to be Central Bank deputy governor Matthew Elderfield, who is in charge of regulating Irish financial institutions.

The changes could be a “mixed blessing” for banks, said Jonathan McMahon, now global head of bank regulation and restructuring at consultants Mazars but who was until recently the Central Bank’s director of banking supervision.

“Central bankers’ suspicion of rules-based supervision might lead to a push to simplify regulatory regimes,” said McMahon in a report on the banking union. “Conversely, there will be more willingness to interfere in day-to-day business decisions, including the appointment of staff.”