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Towards Financial Stability? -

The project of a Banking Union

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Email: [email protected] Internet: www.europois-online.org

FAKULTÄT VIII WIRTSCHAFT UND MANAGEMENT INSTITUT FÜR VOLKSWIRTSCHAFTSLEHRE UND WIRTSCHAFTSRECHT Prof. Dr. iur. Markus C. Kerber

© Prof. Dr. Markus C. Kerber 1

I. European Banking Union: What is the situation? II. Steps to the institutional implementation of the Banking Union III. Legal problems and critical issues in terms of institutional economics



Email: [email protected] Internet: www europois online org


I. European Banking Union: What is the situation?

A name for a vast project comprising: 1. A single rulebook;

2. A centralized monitoring and supervision of banks within the EU;

(Single Supervision Mechanism)

3. An integrated mechanism for solving banking crisis; (Single Resolution Mechanism)

4. A common framework of deposit insurance





Single Rulebook – CRD IV-Paket

• - Regulation No. 575/2013 as of June 26th 2013 • - Directive 2013/36/EU as of June 26th 2013 -> Applicable from January 1st 2014 • -> material banking supervision regulation • -> is accomplished by various regulatory acts of legal

implementation





Single Supervision Mechanism (SSM)

• Proposal of the EU Commission of September 12th 2013

• October 15th 2013: adoption of 2 regulatory acts by the

ECOFIN-Council 1. so-called SSM-Regulation 2. Regulation to amend the EBA-Regulation (EU) 1093/2010 • Publication in the Official Journal has been made on

October 29th 2013





The resolution and liquidation of banks (Single Resolution Mechanism) 1. Proposal by the EU Commission as of June 6th 2012 for a Directive

regulating the recovery and resolution framework for credit institutions and investment firms(so-called BRRD);

2. Proposal by the EU Commission as of July 10th 2013 for a

regulation of the EP and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund (so-called SRM-Regulation).





BRRD – Bank Recovery and Resolution Directive

June 27th 2013 ECOFIN-Council reached agreement on a common content Since then Trilog-Negotiations between the Council and EP with the involvement of the Commission





SRM-Regulation

• Working group meetings in the Council

• Working-out the position of the EP

• Time limit: closing of Trilog-negotiations in march 2014 to allow for its adoption before the end of the current legislative period (EP-elections in may 2014)





II. Steps to the institutional implementation of the Banking

Union


Email: [email protected] Internet: www.europois-online.org



Presenter

Presentation Notes

Good morning The purpose of this presentation today is to talk about banking supervision at the ECB and to set the pace for all internal preparatory work for setting up the new function.

1. Timeline of the SSM Regulation

10

Nov 4 2014 (1 year after entry into force of the Regulation)

Legislative phase – SSM Proposal, ECOFIN

Trilogue phase with the European Parliament

Finalisation of SSM (and EBA) Regulation(s) legislative process

Implementation phase

Effective start of ECB supervision

Jun 2012

Sep 2012

Dec 2012

Apr 2013

12 Sep

Van Rompuy Report

Commission proposal

ECOFIN

Adoption in EP plenary

Pre-legislative policy phase

15 Oct Adoption in EU Council 3 Nov Likely entry into force

Political agreements in Council/ COREPER

© Prof. Dr. Markus C. Kerber

Presenter

Presentation Notes

Publication in the Official Journal of the EU Regulation enters into force on 5th day following publication ECB decisions on SSM (organisation, staffing, recruitment) after entry into force of SSM Regulation (preparation started) ECB to assume supervisory tasks 12 months after entry into force of legislation

2. The Inter-Institutional Agreement IIA

Transparency and accountability: The IIA between the EP and the ECB The Agreement is basically finalised as acknowledged by the declaration of the two Presidents, Mr Schulz and Mr Draghi, but formally subject to the approval by the EP plenary (7-10 October) and the Governing Council. It details the provisions for the transparency and accountability of the ECB as supervisor toward the EP: • EP can veto the ECB’s choice of the Chair and Vice Chair of the Supervisory

Board, • the Chair of the supervisory Board will be heard in front of the EP at least

twice a year, • hold confidential oral discussions with MEPs of the ECON Committee, the

ECB must provide “comprehensive and meaningful records of the proceedings” of the Supervisory Board.

• at the same time, appropriate provisions ensure the safeguarding of confidential information.


3. Structure of preparatory work

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WS1 Mapping of Euro Area banking System

WS2 Supervisory legal issues

WS3

Supervisory model for the SSM

WS4 Supervisory data reporting framework

WS5 Balance Sheet Assessment

Task Force on Supervision

High-Level Group chaired by the ECB

President

Project Team


4. Scope of direct supervision According to the Regulation, the ECB will supervise all credit

institutions in SSM-member countries. It will have direct supervisory powers over the largest banks that

meet any of the following criteria:


Assets over EUR 30 bn

5. Organisation of the micro-prudential function

Micro-Prudential Supervision I DG

Large Complex Banks

Secretariat Div. Division

Micro-Prudential Supervision II DG

Micro-Prudential Supervision III DG

Micro-Prudential Supervision IV DG

Direct Supervision Indirect Supervision

Horizontal Supervision

Large Cross-Border Banks

Large Domestic Banks

Medium-sized Domestic Banks

Subsidiaries & Specialists B.

Horizontal Supervision

Specialized Expertise

± 30 banking groups ± 100 banking groups

14

Micro-prudential function

1 Director General 2 Deputy Dir. Generals 7 Divisions



1 Director General 3 Divisions

15

Defining BSA objectives Restoring confidence

in euro area banks

• Meets the expectations of markets as the analyst reports indicate expectations of a thorough recapitalisation

• Ensure credibility and comparability between different jurisdictions and banks

• Confidence-building at the start of SSM supervision

• Fact-finding and build-up of SSM expertise and collaboration

• Strengthen health of EU banks

Increasing transparency

• To be achieved through a comprehensive assessment, incl. BSA • Possible follow-up actions include recapitalisation against a to-be-determined threshold

As it has possible fiscal impact, backstop commitments are required upfront

6. Primary objectives of the BSA


Three phases of the BSA

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Phase I Risk-based portfolio selection

Phase II

Execution • Data integrity validation (DIV) • Analysis and review of the exposures in the sample • On-going quality assurance

Phase III Collation, final quality assurance, consistency checks, reporting to the Supervisory Board

Stress test


7. Timeline of SSM-related recruitments

17

Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14

SB Chair

Senior Management

Management Assistants Pool of external candidates to backfill internals

Internal call for expression of interest

Middle Management Initial priority: DG Micro I and DG Micro II

Expert level

Regular ECB recruitment including financial stability and shared services

DG Micro III and DG Micro IV

Initial priority: DG Micro I and DG Micro II DG Micro III and DG Micro IV


19

DG Micro I 221 FTEs

Div. 1 Div. 4 Div. 5 Div. 6 Div. 7 Div. 2 Div. 3

DG Micro II 192 FTEs

Div. 1 Div. 5 Div. 6 Div. 7 Div. 8 Div. 4 Div. 2 Div. 3

~ 43 significant banking groups

Indirect Supervision over less significant banking groups

DG Micro III 80 FTEs

Div. 1 Div. 3 Div. 2

Horizontal Supervision & Specialised Expertise Secretariat

Secretariat Div. 25 FTEs

DG Micro IV 251 FTEs

Crisis Managemen

t Div.

Sup. Quality Assurance

Div.

Authorisation Div.

Sup. Policies Div.

Methodology & Standard

Dev Div.

Enforcement & Sanctions

Div.

Risk Analysis Div.

Planning & Coord. of SEP Div.

Centralised on-site Div.

Model Validation

Div.

~ 84 significant banking groups

~ 3,500 credit institutions directly supervised by NCAs

Organisational structure and total headcount estimates for 2013-2015 endorsed by the GovC on 19 June

Direct Supervision over significant banking groups

Details on the Prudential Supervision function


III. Critical comments on legal problems and pitfalls in terms of Institutional Economics 1. Institutional Economics 2. Legal problems 3. Unadressed issues 4. Conclusions





1. Institutional Economics

- Should a supranational central bank have the function of banking supervision?

- Collateral policy is always a source of risk. Liquidity policy in the framework of monetary policy could encourage as well a risk-taking attitude by banks.

- Will there be no longer “national bias”? French lobbying for special positions shows that centralization of banking supervision does not do away with national bias. On the contrary!





- SSM and SRM are not the same entity: Instead of passing the case from supervision immediately to resolution, it will take ages to liquidate a bank which, as a result of the supervision process, is deemed to be unable to survive.

- SRM and its funding method create an incentive for the less contributing countries and banks to use funds for the sake of those banks which are in particular at risk.

- Special problem: The contribution to the Single Resolution Fund by German mutual and saving bank will be multiplied, whereas this banking sector has never used rescue funds before.





2. Legal Problems - Art. 127 AEUV and Art. 352 AEUV are no basis for a

SSM - Art. 114 AEUV (Treaty for the Functioning of the

European Union) is no legal basis for SRM - SRM as a by-pass Treaty - no legal protection in a national administrative court,

but only in the European Court of Justice





3. Unadressed Issues - The comprehensive risk assessment by ECB concerning

122 banks of significant size is a test for the “no national bias thesis”.

- Till the build-up of a 55 billion resolution fund, the Banking Union will need a backstop solution. The ESM would be well fitted, but would then – economically speaking – have access to Central Bank money

- A single rulebook without the UK and Sweden will invite to regulation arbitrage.

- The collusive relation between banks and states will not be abandoned but will through ESM be reinforced.





4. Conclusions How EFSF/ESM and ECB will work together in the Banking Union





How to circumvent the interdiction of ECB to intervene on primary market


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