Regulator warns banking union could split Europe

Monday, 24 September 2012 00:00 - - {{hitsCtrl.values.hits}}

Reuters: Plans to create a European banking union risks a supervisory split between countries in the euro zone and those outside, Europe’s top bank regulator said on Wednesday, warning of his concerns about the latest plan to tackle the financial crisis.

Last week, the European Commission unveiled plans for the European Central Bank to supervise all euro zone banks as an initial step towards a banking union, a proposal that has divided opinion within the eurozone and worried neighbouring states who fear their banks will be indirectly affected.

Speaking to lawmakers in the European Parliament, Andrea Enria, the chairman of the European Banking Authority, warned that the union, forming a united front among euro zone countries to protect their lenders, risked seeing one set of rules applied to banks under the ECB’s watch and another to those outside.

“We risk a polarisation ... between the euro area, with single rules and supervisory practices, and the rest of the (European) Union, which would operate with a still wide degree of national discretion in ... applying the single rulebook.”

In his first public remarks since the announcement of the proposal, the Italian economist said that although banking union was something that “needs to be done now”, the challenge would be “finding the right glue to keep the single market together”.

His remarks reflect a concern shared by many countries that rules such as those on capital, that dictate how much banks must hold in reserve for losses, could be applied differently.

There are three major steps in a banking union: the ECB being given responsibility for monitoring all eurozone banks and others that sign up; a fund to close down and settle the debts of failed banks; and a fully fledged scheme to protect savers’ deposits.

Enria’s comments underscore one of the central problems created by this union, namely that it will drive a wedge between those countries inside the scheme and those outside, whose banks may suffer as a result.

Britain, for one, does not use the euro and will stay outside the scheme, but many international banks in London have operations in the euro area that will be affected by the ECB’s new supervisory reach.

London is worried that the ECB, emboldened by its new powers, will demand regulation that could undermine the city’s position as Europe’s de facto financial capital. Similar concerns are shared by countries such as Sweden.

Many believe the European Banking Authority, set up to coordinate the supervision of banks in response to the financial crisis and which is run by regulators from across the European Union, could act as a counterbalance.

The European Commission has already suggested a special voting mechanism among EU regulators as a counterweight to the power of those in the euro zone.