Economic and Monetary Affairs Committee Visit to Ireland 26-27 November
Programme of the Visit
Monday 26 November: John Bruton, former Prime Minister, former EU Ambassador to Washington, now Chairman of the Dublin International Financial Services Centre, Minister for Public Expenditure and Reform, Brendan Howlin, Minister of Finance, Michael Noonan and IBEC.
Tuesday 27 November: Alan Dukes, Chairman, Irish Bank Resolution Corporation, Patrick Honohan Governor of the Central Bank, Minister of State for European Affairs, Lucinda Creighton, members of the Joint Committee on Finance, Public Expenditure and Reform of the Irish Parliament, David Begg, General Secretary ICTU.
On Monday prior to the start of the delegation visit, Sharon Bowles, will speak at the Institute of International and European Affairs (IIEA) on "Towards a Banking Union"
Time: 12.30 to 14.00
Address: 8 North Great Georges Street, Dublin 1, Ireland.
Link to IIEA web site http://www.iiea.com/events/towards-a-banking-union
Speech by Sharon Bowles, MEP at the IIEA on "Towards a Banking Union"
26 November 2012
Thank you for inviting me to speak to you again.
The new big kid on the block is 'banking union' and the single supervisory mechanism, I will say a few things now about its origin and where it has got to, but as before I am sure the most interesting part will be when it comes to answering questions.
First what is it, this banking union?
Well, it probably started out as an idea to mutualise deposit guarantee schemes in order to stop the flow of deposits out of banks in peripheral countries. Quite logically Mario Monti said if all the banks had the same backing by way of deposit insurance, then that would remove the incentive for depositors to move money from Spain, Italy or elsewhere into safer countries.
Of course there were immediately problems with such a suggestion, in that deposit insurance schemes throughout the EU have to a large part been used up in recent rescues, some are pre-funded and some post funded.
However it grew from that into recognising that a single currency normally has a single banking supervisor and common backstop - usually the Treasury or fiscal authority - and the idea was to mimic this for the Eurozone. Indeed those who have always sought a full fiscal union saw this a step on the way.
Since then it has morphed and modified because there is reluctance to mutualise bank debt which is three times sovereign debt, and as you know there is reluctance to mutualise sovereign debt.
However the plan to have strong and consistent supervision by the ECB was endorsed by the European Council, and indeed it was made a precondition for allowing direct recapitalisation of Spanish banks from the ESM - which was the problem in focus at the time. Of course other countries would then also have to get equivalent treatment - and I do recall making this point vis a vis Ireland.
So then the plan was to have a single supervisor - the ECB - and a common deposit guarantee scheme, to be followed by a common resolution procedure with ESM backing.
The next casualty was for the common deposit insurance to be dropped under massive protests from German Savings banks. To be honest given, as I said, that most schemes are in deficit this probably makes no immediate difference.
Then the recourse to the ESM started to be undermined and certainly the noise coming out of Germany, echoed in the European Banking Conference in Frankfurt last Friday, is that the recapitalisation should only be for new capital problems that develop under the ECB regime and not 'legacy' ones. Certainly if legacy ones are allowed then some 250bn of the ESM seems to be spoken for because Dexia now needs 100bn (that is Luxembourg, France and Belgium), The Spanish Cajas/Bankia need 60bn, and Ireland has a substantial case too to transfer some higher cost assistance from other sources into that route on an equal treatment basis.
So in the end - now - there are two immediate pieces of legislation before the Council and Parliament on this subject making up the so-called Single Supervisory Mechanism or SSM: a council regulation that requires unanimous voting to set up the ECB as the supervisor for the Eurozone and also for any outs that want to join; and a co-decision amendment to the European Banking Authority regulation to deal with changes to the voting procedures to compensate for the fact that the Eurozone is a voting caucus which distorts the single market balance of the EU wide EBA arrangements. There are, rightly, concerns by just about everyone as to what this Euro-centric arrangement will do for the single market but the broad consensus is that it is worth it to gain some Eurozone stability.
I confess myself to having doubts about the relative benefits now that it is looking very 'banking union lite' but the Leaders endorsed the proposal again at the last but one summit together with a ridiculously fast timeline to complete it by December. That will be well before most of them have understood what it is all about and certainly before citizens have found out about all the implications. Anyway, for now we are getting on with it, not least because the promise of direct recapitalisation has not been withdrawn as such, so there are interests from several countries.
In the Parliament we do an opinion on the Council directive on the ECB but do not have equal powers with the Council. On the EBA regulation we have equal power and have to agree. So from our side what will happen is that we will hold the ECB supervision regulation hostage through not agreeing the EBA regulation until we get what we want on the ECB. Meanwhile in the Council where unanimity is required for the ECB package member states will hold that hostage until they get what they want on the EBA package.
So I could be chairing some very interesting trialogue negotiations before long.
Turning to some of the specific issues that are of concern.
First, Democracy and Publicity. Pushing through a single supervisor mechanism separately from the follow on stages of a common backstop funding does not mean that sovereignty is not being given up, or that some mutualisation is not happening. No matter how it is phrased or constrained the need to stand together and behind one another's banks will be present in the same way that has happened for sovereigns. It must be so otherwise there would not be the 'decoupling' of individual member states banks and sovereigns in the way that is expounded all round as happening.
Property rights are quite fundamental within banking supervision and some consider the steps being taken now to be larger than those of creating the monetary union - certainly if you measure it in terms of liability with bank debt three times sovereign debt then that is one indicator.
ECB accountability is a big issue. In some ways it is made even more complicated by the fact that the mutual backstop is being postponed. The present arrangement means that if there is a funding problem with a bank the ECB hands it back to the Member State and their taxpayer to sort. So on top of accountability to the European Parliament we have to build in accountability to national parliaments, and indeed also to national courts.
If a bank has a banking licence revoked, there has to be an appeal process quicker than the ECJ. I need not point out that the national consequences of such an action as losing a banking licence could be pretty devastating.
There are also concerns about how to keep supervision separate from monetary policy. This is a very big concern in some countries, but of course there are many central banks that also do supervision and the ECB as well as others are looking at the various models for how this separation is achieved.
Then there is how to deal with the Euro outs. The original proposals left them out in the cold without equal representation even if they chose to join the SSM. There was even the proposition that if there were a need for the EBA to intervene with binding mediation between national supervisors, this bound euro-outs but not the ECB.
Fortunately it is now recognised that as far as possible there have to be equal rights. So either everyone is on comply or explain with regard to EBA rulings or the ECB like other supervisors has to be bound.
Within the ECB the intention is to have a supervisory board, to deal with the supervision aspects and now it is looks if there will be equal voting rights for any euro outs that have joined the SSM, and the ECB Governing Council, which we can not shift from being Euro only will just endorse decisions in a so-called silent procedure where the board decision stands unless stopped.
Then we come to the EBA and voting within that. Various schemes exist and this is quite hard to sort out when we do not know if the balance will be 17 - 10 or whether many outs will join the SSM. For now it seems sensible to have a double majority to make decisions - that is a majority of those in the SSM and a majority of those that are out. When there are not many outs left, then it may need to be looked at again.
Finally, I will just say a couple of things about the UK position. It would be wrong to think that the UK is just on the sidelines of this. One third of the banks in the city will be in the SSM because London is host to many banks. The vast majority of the capital market activity for the Eurozone takes place in London and hence for any capital market event where the market regulator and prudential regulator have to work together over delaying disclosure until the bank contingency can also be announced, the ECB and the UKs market regulator will have to have an understanding. Indeed I believe some of the large Eurozone banks have already been asking the ECB about this using the UK's draft memorandum of understanding between its prudential and conduct authorities as a check list.
Then beyond the so called 'single rulebook' of the more harmonised capital requirements and secondary legislation from the EBA, there will now be a supervisory handbook dealing with supervisory methodology for the whole of the EU. It is inconceivable that this can be constructed without the UK playing a substantial cooperative part. The EBA will coordinate this and I have been helping Andrea Enria to get the ECB and Bank of England to jointly chair the working group.
So that is where we are at the moment. The Parliament is scheduled to adopt its committee position this Thursday and we have negotiation time with Council blocked out for the week.
There are rumours in both Parliament and Council that there may be a delay and I expect my blackberry could be hot with messages over the next few days.
I should say that this is a very busy time as we are also trying to finalise the 2 pack and capital requirements directive - with the prospect of yet more tasks for the Irish Presidency if we don't.