18 October 2012

FT story on illegality of Banking Union proposals: Graham Bishop comments

The problem: TFEU Article 127 (6)

"The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions…"

Some issues arising:

1. The decision must be unanimous by the Governments of the EU27 States. So any State can veto – perhaps the UK, but the Czech Republic has already threatened to veto if they do not get suitable influence for the 'outs'. Note that the associated legislative measure to amend the powers of the European Banking Authority is a Directive that can be changed by a QMV.
2. The Council can only decide after 'consulting' the Parliament – a relic of the pre-Lisbon Treaty days when the Parliament barely had any influence, rather than the co-decision it has today. The standard Parliamentary tactic was to withhold its opinion until it got what it wanted. In any case, it can now fail to act on the EBA revision and achieve the same result. So the EP will have a powerful voice.
3. The key problem is that this provision can only be used to confer tasks relating to 'policies' rather than take on the function of actually supervising banks.

The FT story about 'illegality'

Today’s FT has a story that leads “The headline is that the Commission’s supervision blueprint — as announced in September — is illegal in key parts”. The full story is here (FT subscription needed) and the essence is that the Commission plan for a separate body within the ECB to receive delegated powers would be ultra vires. The Council lawyers offer some compromises that might get round some of the problems but, in my view, make an already cumbersome concept so cack-handed that it would probably not work in the heat of a major crisis. So there is a major risk that it would not deliver at the moment of need.

Moreover, the plan is to give even less influence to the outs than the existing proposal. So the risk of several votes against must be considerable. Perhaps this is the time to step back and reflect rather more calmly on how to achieve the desired goal, as the political slogan 'banking union' hides enormous technical issues surrounding the power to resolve (i.e. liquidate) banks and underpin deposit guarantees schemes so that uninsured depositors do not feel the need to flee. It is likely to throw into sharp relief many of the issues that lie ahead for the progress of the two-stage van Rompuy Report on moving to a genuine EMU. As always, the issues boil down to 'who pays?' and how can that entity be sure that there is real accountability (really meaning 'control') over the large sums that are likely to be involved. Settle that and key problems in banking union become far more tractable.

In the early hours of Friday 19^th October, we are likely to get the HOSGs' first thoughts on the van Rompuy paper, 'Towards a genuine EMU', and the President’s "aim is to give an impulse to on-going work on important legislative proposals, in particular as regards the Single Supervisory Mechanism for the banking sector".

Perhaps the best impulse will be to slow down and prepare a solution that is both technically robust and politically feasible for the 'outs' to accept readily. The push to a genuine EMU is very likely to require a major revision of the basic Treaties that may be ready for approval in, say, 2015. This would provide the time to sort out these technicalities. If some States do not wish to accept this, then they always have the option of using the provisions of the Lisbon Treaty to leave the EU.

What to do in the meantime?

A new dimension has crept into the discussion in recent months: should 'Europe' become financially responsible for the 'national' mistakes of the past? It is easy to see that if Europe has collective control in the future – of banks and public finance – then it should pay collectively for any future mistakes of its own judgement. Understandably, taking responsibility for legacy mistakes is a different matter and this has become an acute problem for any Spanish application for a support Programme.

The Commission's Resolution proposal is clear about separating a failing bank into the 'good' part and a 'bad bank'. The good/bridge bank that contains the systemically important systems needs to continue. So the principle of the ESM recapitalising a clean, good bank (that might well be subject to European level supervision) should be straightforward. Why Europe should fund the past supervisory mistakes that are the assets of the bad bank is a different question. So the prospect of the ESM re-capitalising good banks may help calm markets.

However, a decision by the HOSGs tonight to start creating the van Rompuy 'specific and time-bound roadmap' should encourage both bank depositors and holders of government debt that Europe really is embarking on a journey that will see major improvements to competitiveness, thus economic growth and then balanced budgets.

© Graham Bishop