European single supervisory mechanism: European banks now under control?
Following the bankruptcies of the Hypo Real Estate Bank (Germany), Dexia (France-Belgium) and more recently of Laiki (Cyprus), the EU is about to put in place a European Banking Union.
One of the components of this Banking Union will allow the European Central Bank (ECB) to be entrusted with specific tasks concerning policies relating to the prudential supervision of credit institutions. The interview below is with Marianne Thyssen (MEP, EPP-Group, Belgium) who is the rapporteur for this report in the European Parliament which was adopted on 12 September.
Marianne Thyssen, what is the responsibility of the banking sector in the current economic and financial crisis which is hitting Europe ?
Last month it will be five years since the American bank Lehman Brothers filed for bankruptcy, an event which triggered a financial crisis from which we are still facing the consequences. The drive to seek higher returns on their banking operations than those produced by traditional retail banking pushed many financial institutions to assume too much risk. The market was flooded with structured products and derivatives that were little understood but purchased with enthusiasm. All went well until some investors started raising questions on the sustainability of all these debts. The resulting distrust and the close links between the financial institutions - many of which were vital for the financial system - did the rest. At the same time it has to be acknowledged that supervisory authorities in many States had their share of responsibility because all this happened with little or no supervision.
The EU has therefore decided to put in place a supervision of European banks. You are the rapporteur at the European Parliament for this text conferring supervisor powers on the European Central Bank. Could you explain how this supervision of the banks is going to work ?
The European Union has learned from the crisis and has adopted rules to ensure that all financial actors, products and markets are appropriately regulated and efficiently supervised. The so-called banking union will be obligatory for all eurozone members and voluntary for the other EU Member States. The establishment of the European single supervisory mechanism (SSM) is the first step in the banking union and will become fully operational in the autumn of 2014. The SSM will cover all 6000 banks in the euro area and all the banks in those non-euro EU Member States wishing to participate in the system. Banks believed to be significant (numbering 150 - 200), through their size or crossborder profile, will be supervised directly by the European Central Bank. The other banks will be looked at by national supervisors but with the possibility for the ECB to step in if needed. A good working relationship between the ECB and the national supervisors (in Belgium the National Bank) will therefore be crucial.
In practice, if this supervision works out, does it mean that banks within the eurozone will no longer be at risk of going bankrupt or require an in extremis bailout with taxpayer's money?
The SSM will ensure a truly European supervision that is not prone to the protection of purely national interests or influences. It will detect risks within banks at an earlier phase and avoid fragmentation of the European banking system. It is important to emphasize that the SSM only concerns supervision. It was agreed to make the set-up of the SSM a precondition for the possible direct recapitalisation of banks in difficulties by the European Stability Mechanism, a European financial emergency fund. In a case where the ECB detects that a bank really needs to be resolved, for example when the resolution is in the public interest because the bank's failure would damage financial stability, a European single resolution authority will take over. Every national, and in the longer run a single European, resolution mechanism should have a strong financial structure, built on contributions from the industry whereby these contributions should mirror the riskiness of that institution, without having to take recourse to taxpayer's money.
Will the European Central Bank be accountable for its supervision to the European citizens ?
The European Parliament has always underlined the importance of a strict democratic control over the ECB as the new banking supervisor from the principle that any transfer of supervisory tasks from the national to the European level must be accompanied by arrangements to guarantee transparency and accountability at the European level. A tight system of accountability of the ECB to the Parliament is included in the legislation, the details of which are set out in an inter-institutional agreement between the two institutions. The European Parliament will have the right to ask questions and organise hearings. In addition, the Parliament will have a major role in appointing or removing the Chair and Vice-Chairs of the Supervisory Board, responsible within the ECB for the supervisory task, as well as extensive enquiry rights.
The interview was conducted by Johanna Touzel