Cracks in the EU banking union plan

By:
Euromoney Skew, Sid Verma
Published on:

Competing objectives plague the European banking union plan amid German fears over rising liabilities and the supervision of its public sector banks.

To put it kindly, there is a phrase for it: the audacity of hope. Before the European Commission’s banking-union proposals threw a spanner in the works, policymakers had hoped the European Central Bank (ECB) by January 2013 would be bestowed extensive prudential supervisory powers for euro-area banks, at first, for those receiving European Stability Mechanism (ESM) assistance. 

However, buttressed by German scepticism, a rift has emerged over the power of the ECB relative to national authorities, the jurisdiction of the European Banking Authority (EBA) and the designation of crisis-management powers. In summary, the banking-union plan will “be less ambitious and less rapid” than initially envisaged, reckon Deutsche Bank analysts, echoing market consensus.

In DB’s words, here are the key elements of the Commission’s proposals:

  • The transfer of extensive prudential supervisory powers over euro-area banks, based on Art. 127,6 TFEU, on to the ECB, starting in January 2013 for selective banks (ie those who may receive financial assistance from the ESM), widened from July 2013 to systemically important banks and from 2014 to all banks;
  • the establishment of a supervisory board at the ECB to set up a Chinese Wall to the ECB’s monetary policy mandate; this supervisory board would be responsible for “planning and execution” of banking supervision, while decision-making powers would remain in the hands of the governing council;
  • changes to EBA’s governance structure which would give non-EMU countries effectively veto power;
  • a communication on the intention to make progress on designing pan-EU restructuring and deposit guarantee schemes.


The banking-union objective is caught between competing aims, according to analysts. Some see the objective as a means to craft a stable institutional financial framework for the euro-area, along with better fiscal co-ordination, and others who see the objective in narrower terms “in the context of the debate about direct ESM assistance to individual banks, which necessitates taking banking supervision for those banks out of the hands of national authorities and transferring it to the EU-level”, according to Deutsche.

The other ideological stumbling block remains the aim for a single market for financial services. As DB analysts put it: 

“The relative importance of either objective will have a bearing on the institutional design of banking union: stressing the latter objective would put an emphasis on a strong role for EBA to ensure the consistency of rules and supervision in the EU-27 and would argue for an open architecture and weaker role of the ECB, whereas emphasis on the former objective would give the ECB a prominent role and strive to integrate crisis-management systems at the EU level.”


German public-sector banks and co-operative institutions wield extensive political influence, a fact that has delayed the industry’s consolidation. In this context, analysts reckon these institutions are likely to be successful in repelling EU-level supervision. Here’s a round-up of Germany’s wish-list, again courtesy of DB:

  • Banking union should start later and not be rushed.
  • EU-level supervision should be limited to the largest, cross-border banks, but should not extend to small, locally active banks.
  • Before being put under direct EU-level / ECB supervision, each bank should have undergone yet another stress test to ascertain that there are no hidden risks.
  • Resolution, resolution funds and deposit-guarantee schemes are to remain in national hands with no pooling of these funds at the EU level.
  • In the new, to-be-established supervisory board at the ECB, voting should not be based on one-country, one-vote, but should be based on weighted voting rules, giving large countries (ie Germany) more clout, if not veto power. In addition, this supervisory board,
    rather than the ECB’s governing council, should have ultimate decision-making power.
  • The German position is easily explained by two driving factors: (i) the specific structure of the German banking system and the political clout of savings and cooperative banks; (ii) concerns about the use of German financial resources to support weak banking sectors elsewhere in the euro-area.


The timely creation of a banking union of sorts could engender optimism about the institutional shift towards political and fiscal union, suggesting a structural shift in crisis management/prevention is possible. In the short-term, the banking-union plan should reduce the risk of over-zealous national supervisors promoting home-bias by reducing the fungibility of liquidity and capital buffers for cross-border banks. In this context, giving the ECB prudential supervisory powers makes eminent sense since it reduces the risk of regulatory abitrage. However, in the short term, it is hard to see how a banking union of sorts can halt  financial fragmentation within the eurozone as capital-constrained banks re-assess their cross-border business models and investors re-assess the theory of eurozone convergence. 

In sum, here's DB’s bearish conclusion:

"Banking union will remain a torso: instead of a consistent, integrated design, a half-baked system will be established that leaves out crisis-management instruments – ignoring that supervision and crisis management are inextricably linked.

 ... EU-level supervision will remain weak and dependent on the support of national supervisors which have little incentive to cooperate and to reveal problems in their banking sectors at an early stage."