04 September 2013

Deutsche Bank: EU Banking Union - Right idea, poor execution

The report makes the following observations:

Single Supervision is the most advanced component of the Banking Union. Shifting banking supervision to the ECB, and thus to an institution with a European perspective, may help to overcome the dangerous tendency towards a re-fragmentation of Europe’s banking markets and may help dispel some of the doubts over the quality of European banks.

Still, the choice of the ECB as the pan-European banking supervisor is problematic. It has resulted in unwieldy decision-making structures and overlapping competences.

The planned Balance Sheet Assessment (BSA) before the start of the Single Supervisory Mechanism could be a major market-moving event. Before a BSA is done, it must be clear how banks would be re-capitalised if need be.

In the draft Recovery and Resolution Directive a key building block of regulatory reform has finally been presented. It has many sensible elements that will remove some uncertainty and strengthen market discipline. However, it leaves member states with too much discretion, making competitive distortions likely.

The Commission’s Single Resolution Mechanism (SRM) proposal is logical, but problematic. Single supervision cannot work without an effective resolution authority and a credible financing mechanism. It also needs effective decision-making structures – all of which the SRM does not deliver.

Member States' lukewarm reaction to the SRM proposal is more than regrettable, because it reveals fundamental opposition rather than mere technical concerns. It reveals that member states are still unwilling to face up to the logical consequences of the Banking Union concept for national sovereignty and its financial implications. Unless this changes, Banking Union will fail.

Full report

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