FT Alphaville " Let's not be afraid of... banking union It's a proposal from the EU Commission. You know, the one that wants to move towards a "federation of nation states": Anyway. The banking union proposals can be found here and come in three bits. One: details of the Single Supervisory Mechanism (SSM) for the ECB. Two: a proposal for amending the role of the European Banking Authority. Three: a more general "roadmap." It's important to remember that these are only proposals and are subject to change. But JPMorgan's Alex White has taken a stab at some of the current problems: ECB supervisory influence to extend across the EU: The Commission expects non-Euro area members to replicate the prudential approach taken by the ECB. Other EU members would be expected to mirror ECB technical standards, with a common European rulebook of "uniform supervisory practices." This may be unpalatable for many of the Euro "outs" - it could theoretically deny the Bank of England (amongst others) fully independent use of its macro-prudential toolkit. EBA to be given powers to overrule national regulators: In addition, the European Banking Authority's powers of "binding mediation" are to be extended to make it easier for it to overrule national regulators, by removing the role of the "blocking minority." The EBA already has powers to overrule Members in areas relating to its remit, but the proposal significantly enhances these. We expect the Euro "outs" would be most likely to be affected, as the EBA is be heavily ECB influenced under the new model. ECB might fear responsibility without control: The ECB is tasked to supervise all Euro area banks. In practice it may find it difficult to implement decisions without leaning heavily on Euro area national authorities for both information and resources (which could potentially be withheld). One possible "nightmare scenario" for Frankfurt could see the ECB effectively unable to act without cooperation from national supervisors, and then forced to carry the can for any of their failures. The ECB can also expect scrutiny from the European Parliament, as promised by President Barroso this morning. Prudential Regulations to be enhanced / speeded up: As expected, the Commission is calling for accelerated implementation of existing prudential regulation, on capital (CRD), resolution (RRD) and deposit guarantees (DGS) - calling for these to be signed off before the end of 2012 (without including specific changes to implementation at the back-end). The Commission will also push for the implementation of a Single European Resolution Authority, to sit alongside the Single Supervisory Mechanism. It will put forward further proposals (possibly in Q1 next year). Unclear who is going to pay, and how: The Commission appears to be silent on how the back-stops implied by a Banking Union (shared resolution and deposit guarantees) are to be funded. This is a critical omission, but we suspect that the Commission wished to avoid triggering a conflict on the most politically contentious aspect of the package. Without these details, it is unclear how precisely any backstop will function. Implementation timeframe remains aggressive (and probably unrealistic): The proposal confirms that the SSM should be implemented by January 2013, with the ECB empowered to act from that point. It will then take over supervision for SIFIs in July and all banks from January 2014. We believe this timeframe is overly ambitious. He also makes the very good point that the UK, along with other non-Euro are countries, is likely to be concerned about the ability of the ECB to set the supervisory agenda for the broader region - as well as the enhanced ability of the EBA to overrule national supervisors. And then there is democratic accountability, or lack of, within the ECB and the issue of sequencing, mentioned by the FT's Alex Barker. Brussels wants the ECB to take on struggling banks first, while Germany wants the ECB to devote its initial attention to systemic banks. But in any case - the final form of this thing is yet to be settled. Related links: Searching for common ground on a European banking union - FT Alphaville Cheat sheet for Europe - FT Alphaville This entry was posted by David Keohane on Wednesday, September 12th, 2012 at 11:00 and is filed under Uncategorised. Tagged with Banking union, eu commission, Jose Manuel Barroso.