One small step toward European banking union, two more big steps to come

Hard work ahead
Hard work ahead
Image: AP Images / Luca Bruno
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Finance ministers from the European Union clinched a deal just before dawn to make the European Central Bank (ECB) chief supervisor over some 150 of the euro zone’s biggest banks. It’s a first step toward banking union that theoretically bolsters the euro and gives European leaders a common way to help ailing banks so economies aren’t dragged down when banks fail, as happened in Ireland and Spain. It’s a good first move—especially considering many observers thought key decisions on banking union would be delayed until next year—but it’s only the beginning.

What finance ministers agreed in a 14-hour emergency session is the first stage in a so-called three pillar plan. (Today and tomorrow EU leaders meet in Brussels to agree to a banking union framework). Leaders must still hash out issues related to other key areas, and here’s where things get trickier.

The first part of the plan creates single supervision over the euro zone’s biggest banks, meaning those with assets greater than €30 billion ($39 billion) or equal to a fifth of a country’s economic output. It also gives the ECB the authority to shutter or restructure banks in trouble or that break the rules, and funnel money into those that need rescue. These initial measures are not likely to require EU treaty changes and this is a good thing as those changes can take years. A hotly contested issue over who would oversee smaller banks was resolved with a compromise. National regulators will still watch smaller banks and the Frankfurt-based ECB can step in if there are problems. There will be a steering committee to guide the ECB’s supervisory work that reports to the ECB’s Governing Council, giving the ECB final say.

All of this seems fairly straightforward and in keeping with other currency unions in which financial sector responsibility takes place at a federal level. But the next steps involving responsibilities and costs get thornier. Discussions over how technically banks will be bailed out or shut down are still in the early stages. Yesterday ministers talked of a pan-European agency to shutter failing banks, but it’s still unclear how much of the costs taxpayers will be asked to shoulder and in which scenarios. Politically these are sensitive areas for governments for obvious reason: no nation wants to be on the hook for the money.

There’s also the question of a common deposit guarantee in which banking customers can count on a guarantee, up to a limit, that their money is protected. The idea is to harmonize rules across countries so that how much is guaranteed and when it’s guaranteed is the same everywhere. What’s unclear, though, is just how much will be guaranteed collectively by euro zone governments and at what cost.

Another area of concern for Germany and other nations is whether the ECB banking supervisory powers should be separated from its monetary policy ones. The concern is that the ECB’s independence over monetary policy could be tainted by dealing with banking bailouts. The theory is that the ECB might be tempted to lower interest rates to help out banks. The jury is still out on this issue.

What role the European Banking Authority (EBA) based in London, and that currently operates as a kind of pan-European financial standards and resolution center, will play down the road is also in question. Some worry that it will ultimately become irrelevant as the ECB writes new rules that override those by the EBA. The British in particular are concerned that they will be “systematically outvoted” by other EU members within the EBA, and Britain demoted to second-class status when it comes to European financial decisions.

Last, there’s the big issue of when this all actually happens. The goal is to get the new supervisory system up and running by early 2014, though already there’s talk of delays (paywall), as the ECB needs time to organize and nations need time to cede regulatory control of their biggest banks. Some countries would like to see the process go faster. Leaders have agreed that once the banking supervisor is in place, troubled banks can be directly recapitalized. This puts countries with ailing banks like France, Italy and Spain in the hurry up camp. German officials have repeatedly called for a slower, more measured approach. “We have reached the main points to establish a European banking supervisor that should take on its work in 2014,” said German Finance Minister Wolfgang Schaeuble, according to Reuters. “We stand by what we agreed, to bring Europe forward step by step.”