Europe Agrees On Common Bank Supervision [ANALYSIS]

Let’s try to make some sense out of the mess as much of it is in esoteric official! Council agrees position on bank supervision

 

Quotes:

Single Supervisory Mechanism (SSM) for the oversight of credit institutions

In June, eurozone heads of state and government stated that when an effective SSM is established, the European Stability Mechanism, which currently contributes to bank capitalisations via member state treasuries, could, following a regular decision, have the possibility to recapitalise banks directly.

 

The SSM will be composed of the ECB and national competent authorities. The ECB will be responsible for the overall functioning of the SSM. Under the proposals, the ECB will have direct oversight of eurozone banks, although in a differentiated way and in close cooperation with national supervisory authorities. Non-eurozone member states wishing to participate in the SSM will be able to do so by entering into close cooperation arrangements.

 

The ECB’s monetary tasks would be strictly separated from supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision. To this end, a supervisory board responsible for the preparation of supervisory tasks would be set up within the ECB. Non-eurozone countries participating in the SSM would have full and equal voting rights on the supervisory board. The board’s draft decisions would be deemed adopted unless rejected by the ECB governing council.

National supervisors would remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. The EBA would retain its competence for further developing the single rulebook and ensuring convergence and consistency in supervisory practice.

 

The EBA is:

The EBA has some quite broad competences, including preventing regulatory arbitrage, guaranteeing a level playing field, strengthening international supervisory coordination, promoting supervisory convergence and providing advice to the EU institutions in the areas of banking, payments and e-money regulation as well as on issues related to corporate governance, auditing and financial reporting.

[More or less the financial plumbers]

Comment: The crucial point is the separation of monetary policy which is an CB problem with no parliamentary dependence (otherwise a CB would not be independent) and supervision which is to be under some sort of parliamentary control.

This separation is to be achieved with the supervisory board.

There should thus be a separation of the legislative, the executive and judicial power with the Prudential board as the legislative, the ECB as the executive and the EBA as the judicial – or sort of.

What is the Single Supervisory Mechanism (SSM) and ECB going to achieve?

 

Professor Jesper Rangvid sums it up in:

Tasks:

I)                    Inspection

II)                  Common rules (level playing field)

III)                Guarantee for depositors

IV)               Arrangements for disbanding banks

 One point of view is that these belong together – we saw what happened when depositor lost confidence in the Spanish banks: Over 100 bio. EUR fled the country into mainly German Sovereign bonds.

Examples of failed attempts to disband are plenty – just mention Bankia in Spain – where you have merged several dung heaps in one much larger – dung heap. This does not bring a solution to anything closer.

The Inspection part is necessary in so far as it has repeatedly been shown that – especially with the large banks – the national bank inspections are not up to the task of unwinding the banks subterfuge – not to say downright fraud seen for instance in the LIBOR scandal. There could be doubt raised if the national inspections ever had the ambition of being anything but a rubber stamp.

The common rules are being implemented bit by bit – there has been a general overhaul of the national statistics in order to get a grip on what is happening.

The demand for a pause to bring these parts together is fine and idealistic – the only problem is there is a time factor involved – or rather several:

a)      In case of a bank in immediate danger of collapsing, things have to move very quickly – the question Friday afternoon is always: Which banks will open on Monday?

b)      Police raids, court appointments for senior management, suicides, state bankruptcies and the like all point to the entire banking sector – and not just single banks – is on the brink of collapse.

c)      The idealistic claim that taxpayers won’t have to pay is getting to be old hat. For instance, it is totally unrealistic that the Spanish banks are ever going to earn enough money to take losses. The dropping real estate prices will consistently undermine collateral of the bank simultaneous with a steady decline in debtors’ ability to pay. Giving the banks grace has not improved the situation.

In other words: There is no time for doing things the right way – we will have to settle for the minor evil. One thing is certain: Doing nothing will be the worst policy as Greece illustrates clearly.

The next question is which tax-payer is to pay? Well the wage earners and businesses hang on to dear life as it is, consumers are tightening

Which banks come under the Single Supervisory Mechanism?

There are three criteria:

1)      Banks with more than 30 bio. EUR in assets

2)      Nationalised banks

3)      Banks with assets more than 20% of the GDP of the resident country

4)      Intervention in difficult cases.

Comment: The banking system of the different countries will be affected very differently (examples):

According to Le Figaro:

Each country should submit at least 3 banks for supervision.

Germany will have very few units under common European supervision as German banking roughly breaks into three categories:

A)     The large international banks like Deutsche Bank and Commerzbank which clearly fall into the sphere of the European Bank Inspection.

B)      Regional banks (Länderbanken) which all but one flies under the radar.

C)      Local banks (Sparkassen) where none meet the criteria.

Spain has a much more consolidated banking system – they have so many nationalised flopped banks for starters; but also a long consolidation process behind it. More than 90% of Spain’s banking will fall under the SSM for one reason or another. Santander, BBVA, La Caixa and Bankia from size alone fall under the SSM and Bankia additionally from being nationalised.

Finland has probably no banks of its own to speak of, so they have no need of the SSM, as the banks in Finland will come under the supervision of the SSM anyhow. That explains why Great Britain and Sweden will remain outside – their entire banking sector will come under the rules and supervision of the Euro-zone. Talk about bank owned states! What concerns the Czech Republic, I don’t know.

Austria is somewhere in between. Nine banks will come under supervision from SSM: Raiffeisen Zentralbank, Erste Bank, Bank Austria, Bawag PSK, Volksbanken AG, Raiffeisenlandesbanken Niederösterreich-Wien und Oberösterreich, Kontrollbank and Hypo Alpe Adria.

Denmark is undecided – the reason is probably as the banks under the inspection would be such a weird collection of foreign banks, banks with foreign interest, mortgage banks and banks where the nationalisation issue is very much up in the air – and as the major player Sweden is keeping out of it….

Danske Bank, Jyske Bank and Nykredit Bank would come under the SSM – but here the problem is Nordea, that is Swedish and under Swedish bank supervision. That also includes 60% of the mortgage banking.

The Netherlands will have:

Nederland ING, Rabobank, ABN Amro and SNS Reaal.

Voting rules

 

Originally it seemed like only Euro members were to have votes, but that was reconsidered so the participating non-euro-countries will have a vote.

The next problem appeared to be the weight of votes where – it seems – Austria, Luxembourg and Bulgaria spoke up for the smaller countries and got: “One country one vote” so the large countries couldn’t just overrule the smaller. Finally there seem to be a promise of mediation when a non-Euro country’s CB and the ECB don’t see eye to eye.

From the diverse collection of newspaper reports the only thing clear is there still are a lot of details to be ironed out.

The problem is there is no time for ironing out details; Germany wants to push ahead and not wait. The reason is obvious: Each time the information has been biased – or to be more direct: Plain wrong and misleading. Valuable time has then been lost just to get figures with an Olympic stadium.