What is the EU Banking Reforms all about

By Published On: 10/23/2012 0 Comments Read More »

The EU banking reforms has been one of the highly discussed topics in recent months and gained even more prominence as the Eurozone countries seem to be split on the issue. In this article, we discuss what is the EU banking reforms and the proposed changes to the banking sector in the Eurozone.

The EU Banking reforms, is a loosely coined term for what is known as the Single Supervisory Mechanism. The financial crisis in Eurozone has brought to light many cracks within the banking sector in the region which set the stage for the proposed reforms with an aim to create uniformity in the banking sector in Eurozone.

The Single Supervisory Mechanism or SSM for short is being proposed, where in the European Central Bank (the ECB) will assume ultimate supervisory responsibilities for tasks related to maintain stability of over 6000 banks in the Eurozone region.

EU Banking Reforms – Proposal and Context

The idea was formally proposed by Jose Manuel Barroso, President of the European Commission on 12th September 2012 on the basis of the Lisbon Treaty that was signed by EU members on 13th December 2007 (Read more about the Treaty of Lisbon) and in particular Article 127(6) of the treaty which is aimed at maintaing price stability and implement a uniform monetary policy in the European Union.

The Single Supervisory Mechanism proposal was drafted by Michel Barnier, the European Internal market commissioner.

The proposal was put forth as a means to restore confidence and trust in the Eurozone and break the disconnect between banks and sovereigns. The proposal would bring forth a common rule book detailing various aspects of banking from capital requirements to deposit protection schemes and a uniform recovery and resolution framework.

Under the SSM proposal, the ECB would be ultimately incharge of the banking supervision, although competent national authorities or banking supervisors would still play a significant role for the conduct of banking supervision.

Single Supervisory Mechanism – The ECB

The obvious choice for the supervisory body was the ECB which could be accountable to the European Parliament. Although other alternatives such as the EBA (European Banking Authority) were considered, the argument for proposing the ECB as the single supervisory body was due to the fact that the most of the EU member states preferred the ECB during an EU Summit earlier this year (June 2012). While the ECB welcomed this proposal, Germany had reservations, especially in terms of the ECB to supervise the 6000 odd Euroarea banks.

The Single Supervisory Mechanism or SSM for short would comprise of a board of one chairman, one vice-chairman, 23 members, 17 representatives of member state bank supervisors. The board representatives were chosen so as to diversify and is made up of members who do not agree to a direct ECB interference in their daily supervisory activities.

Critics of the SSM – Non Eurozone Member States

There have been many economists who have been criticising the implementation of the SSM, the EU Banking Reforms. Amongst the critics, countries such as the UK, Sweden who are not part of the Eurozone and Germany which argues that the timetable to implement the SSM is too quick and too much for the ECB to handle. Germany is of the opinion that the ECB should first assume responsibility for only the larger banks that carry a higher risk. On the other hand, countries such as Spain, France, Belgium and Italy want to see a quick implementation of the proposal.

The biggest issue comes from the fact that in order to get the SSM approved, all 27 EU countries must agree, even though the banking reforms apply to only the 17th Eurozone member states while leaving the option open for the remaining 10 member states to participate voluntarily. Therefore, countries like Sweden, Poland and UK are concerned that under the SSM, Eurozone states could over-rule the 10 non Eurozone member states and thus impose rules on capital requirements and voting rights.

To conclude, the EU Banking Reforms or the SSM is but an obvious step towards closer financial and economic integration of the Eurozone. Although there are some aspects (fine print) that is still required, which is a cause for disagreement among the 27 EU countries. The timetable for implementing the SSM proposal is also being seen as acting too fast. The recently concluded two day EU Summit on October 18th and 19th saw some key leaders, especially French President Francois Hollande wanting to see the reforms in place by December 2012 and come into effect by the 1st of January 2013 and eventually be rolled out across the 6000 Eurozone banks by January 2014.

Further Reading on the EU Banking Reforms

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