European Banking Union: The next ‘big step’

25 Jun 2012

James Kilcourse

The debate on a European banking union has begun, with EU leaders expected to discuss the proposals and a timetable for the plan at the European Council summit on 28-29 June. At this early stage in the process, however, the only certainty is that the UK will not be a part of any European banking regime.

European Commission Proposals

The concept of a banking union was put forward by the European Commission President, José Manuel Barroso, at the informal European Council meeting on 23 May. On 6 June, the European Commission set out its proposals for a European banking union, which it argued is one of the “building blocks” of deeper economic integration. In mapping out the next steps towards a banking union, the Commission’s proposal consists of three elements:

·      a single regulator to supervise banks in all 27 EU states,

·      a bank bailout fund financed by a tax on financial institutions across the EU, and,

·      an EU-wide deposit guarantee scheme to protect savers in the event of a bank collapse.

President Barroso stated that this plan could be achieved by early 2013 without changes in the EU’s existing treaties. In an interview with the Financial Times, he argued that the EU needs to go beyond incremental legislative measures and take ‘a very big step’ towards deeper integration. The banking union proposed by the Commission would use a pan-European institution, such as the London-based European Banking Authority (EBA), which answers to the European Commission. The power to supervise Europe’s biggest banks would shift from national regulators to this central supervisor.

A considerable obstacle to the creation of an EU-wide banking regime in the next six months is Germany’s insistence that a fiscal union should be established before consolidating deposit guarantees. Berlin supports a supervisory regime for Europe’s largest banks, but does not wish to expose German taxpayers to the risks of banks in peripheral Eurozone countries without first putting in place a fiscal union that would allow control over national budgets. The Netherlands and Finland share this view.

Germany is also opposed to a central supervisor overseeing its powerful regional savings banks and would therefore seek to ensure that the banking regime only applies to Europe’s largest banks. Another issue is that France and Germany would prefer supervisory powers to be handed to the European Central Bank (ECB) rather than the EBA, which they believe has failed in its oversight role during the crisis.  The Commission’s proposal is, however, supported by some non-Eurozone Member States, whose economies are dominated by Eurozone-based banks and whose leaders do not want to transfer more power to the ECB.

 

The British Dilemma

A further problem for the European Commission’s proposals is the UK’s refusal to participate in an EU-wide banking union. The UK is home to many of Europe’s biggest banks and is the country with Europe’s largest financial sector. Prime Minister David Cameron has stated that he supports deeper integration within the Eurozone, including a banking union, provided that the UK is not expected to take part. A 27-member banking union would contradict Mr. Cameron’s policy of refusing to transfer any further competences to Brussels. Moreover, the Chancellor of the Exchequer, George Osborne, has insisted that British taxpayers will not be made liable for the recapitalisation of European banks: “British taxpayers will not stand behind eurozone banks and British voters want the British authorities to be in charge of supervising our own banks, especially in a crisis”.

Instead of the Commission’s proposed 27-member banking union, the UK favours a banking union for the Eurozone only, with the European Central Bank (ECB) rather than the EBA taking over supervision responsibilities. They argue that this could also be done without changing the EU treaties, but through a unanimous vote of member states. A Eurozone banking union would tie the banking regime to the euro and significantly deepen banking integration in the single currency area.

Paradoxically, Britain’s preferred option of a Eurozone-based banking union poses its own problems for London. The UK is concerned that a banking union based on current and prospective members of the Euro would have negative implications for the Single Market, particularly in the financial services sector, which is hugely important to the British economy. A Eurozone banking regime could change the rules of the Single Market to better suit Eurozone countries and impose restrictions on the ability of City firms to do business in the single currency area.

Referring to the integration of the Eurozone, George Osborne explained: ‘Under new voting rules, the Eurozone will have as a bloc an absolute majority for most decisions’. The UK may find itself alone with no significant voice over decisions affecting the European banking industry. For this reason, London is expected to push for safeguards to ensure that it can stand apart from the banking union while at the same time protecting the Single Market for all 27 EU Member States. David Cameron failed to secure those safeguards at the December EU summit, but George Osborne has insisted that the argument for safeguards for the UK is now ‘more relevant than ever’. The safeguards seek to ensure that the City of London will not be subject to EU decisions and that a financial transaction tax cannot be imposed without unanimous support.

 

Ireland

London’s refusal to participate in the proposed banking union, and any threat to the Single Market that might arise from this decision, will pose serious questions for Dublin given the depth of the trading relationship between the UK and Ireland. Speaking at the IIEA Brussels Branch on 18 June, John Bruton, the president of the IFSC Ireland group, said that the establishment of a European banking union would be a ‘pro-consumer’ move and would help to confront the problem of banks too big to fail. However, he warned that care should be taken to avoid isolating the UK because of the potential repercussions for the Single Market.

At a meeting of EU finance ministers on 22 June, the Minister for Finance, Michael Noonan, stated that Ireland would not participate in a new European Financial Transaction Tax (FTT) due to fears that financial services business would move from Ireland to the UK if Dublin introduced the tax and London did not. Nine countries will now press ahead with a financial transaction tax under the “enhanced cooperation” procedure. Minister Noonan did not, however, rule out Ireland’s participation in a slimmed-down tax scheme. This is significant because the Commission’s banking union proposals include a bank resolution fund financed by levies on financial institutions and Ireland’s participation in the banking union would necessitate the imposition of this levy. Another issue for Ireland is that the EU bank resolution fund would have to work retrospectively to cover the recapitalisation of Irish banks. On 19 June, Minister Noonan stated: ‘There’s not much of a point if we are contributing to a resolution fund by means of a levy when we have already resolved our bad banks… It needs to be retrospective’.

Speaking in the Dáil on 12 June, An Taoiseach Enda Kenny stated that he is supportive in principle of a banking union and that it could be achieved in a far shorter time than the President of the Commission suggested because it is a less complex project than fiscal union. Media reports suggest that the Taoiseach will back the creation of a European banking union at the European Council summit this week.

 

The Next Step

One of the biggest divisions in the debate about the proposed banking union is whether it should apply to all 27 EU states (and fall under the remit of the European Commission) or only to countries of the Eurozone (and fall under the ECB). The European Commission is championing the first option because, like the British government, it fears a smaller banking union would undermine the European Single Market. President Barroso favours a banking union involving as many of the 27 EU members as possible because, he says, ‘under no circumstances must this be seen as an alternative to the integrity of the Single Market, or indeed the integrity of the union as a whole’. Britain, on the other hand, believes that a European banking union should be limited to the single currency area, for the reasons outlined above. The government in London hopes that the creation of a banking union overseen by the ECB would not harm the Single Market, which has huge benefits for the British economy. In either case, it is likely that the British government will seek safeguards to protect British interests. And, in either case, the creation of a European banking union would represent a further step in the divergence of the UK from the rest of Europe.

As an independent forum, the Institute does not express any opinions of its own. The views expressed in the article are the sole responsibility of the author.