Eurozone banking union that works for Britain?

 
ecb sign

At about 04:45 Brussels time this morning, European Union finance ministers made a bit of EU history.

Their agreement to give the European Central Bank the power to supervise the eurozone's bigger banks sounds horribly technical and dull. But it matters, in helping the eurozone to move a little further away from the cliff edge, while perhaps mapping a future for the UK in an EU increasingly dominated by currency union members acting as a unified bloc.

The deal may represent the most significant new transfer of national powers to a eurozone institution since the crisis erupted in the currency union three years ago - and, for many, it represents the first step towards the kind of centralisation of decision-making that's necessary for the eurozone to survive.

And it includes a possible blueprint for how the UK might avoid becoming too marginalised as a member of the European Union, should the eurozone evolve into a United States of Europe within a wider, looser EU structure.

So it provides a possible answer to those who believe that one consequence of the eurozone doing what it needs to avoid fracture - to integrate politically in a deep sense - is that the UK will be propelled remorselessly towards the EU's exit.

Here is the niggly detail.

The ECB will take responsibility for supervising bigger banks, those with assets (loans and investments) of €30bn or whose assets represent more than a fifth of a nation's economic output. That is about 200 banks initially.

Significantly, loads of French banks will be supervised by the ECB, but few German banks (because its banking industry is more fragmented).

That looks like a victory for Mrs Merkel, except that the ECB will have the power to intervene at smaller banks if it sees problems - so Mr Hollande's dignity is preserved.

Those EU countries like the UK not in the eurozone can opt to join this so-called banking union. They can opt to have their banks supervised by the ECB.

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The deal may represent the most significant new transfer of national powers to a eurozone institution since the crisis erupted in the currency union three years ago”

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The UK won't cede its national banking supervision powers to the ECB, but other eurozone "outs" might (although Sweden and the Czech Republic seem, like the UK, to have decided to stick with their national supervisors, for the time being at least).

As for the Chancellor, George Osborne, he had conflicting instincts in the negotiations. On the one hand, he didn't want to block banking union for the rest - because he believes it is in Britain's interest to help bring calm and stability to the eurozone.

On the other hand, he has the commercial interests of the UK's banks and businesses to protect, and he fears that a more closely-knit eurozone would seek to rig the single market to the detriment of Britain.

He achieved two forms of protections for British commerce.

On the one hand, the European Central Bank has agreed that it will not discriminate against any EU member state in the way that it uses its supervisory powers. The fear was that in setting liquidity or capital rules for the banks under its umbrella, it could somehow tilt the competitive playing field away from London.

As for the outfit that makes regulations for the EU's banks, the European Banking Authority, it will introduce a "double majority" voting system - whose effect should be to preserve a voice for the UK in the making of banking rules.

What this means is that when a new rule is agreed, there will have to be a majority by voting weight of all EU members, plus a simple unweighted majority of the eurozone "outs" and the "ins".

Or to put it another way, if a majority of the eurozone "outs" don't like a new banking rule, they can block it - which limits the voting force of eurozone members acting in unison.

Although this double-majority voting system for the EBA sounds boringly procedural, it could prove to be very significant.

It could provide an important blueprint to preserve the UK's voting voice and weight on the future of the single market, as and when the eurozone evolves into an even more unified political bloc. It implies that the UK might be able to co-exist in the European Union with a currency union that becomes a political union.

But perhaps we are getting ahead of ourselves. Because although the first steps towards banking union agreed early this morning are important, they do not guarantee the eurozone's survival.

If the ECB turns out to be any good at banking supervision, it might in the future prevent eurozone banks becoming as dangerously bloated as those in Ireland and Spain. It might prevent eurozone states going to the brink of bankruptcy as a result of the recklessness of their respective banks.

But, for the avoidance of doubt, eurozone members have not merged their financial resources to provide a single pool of money to rescue banks, or to insure depositors against losses.

The Germans are not even allowing the new bailout fund, the European Stability Mechanism, to put money into Spanish banks - for example - without that capital simultaneously becoming a liability of the over-extended Spanish state.

Or to put it another way, banking union might be a precursor to the kind of fiscal and balance-sheet union that is widely regarded as the sine qua non of eurozone survival, but that supposedly vital financial union has not happened yet. To put it yet another way, Germany is not ready - and may never be ready - to provide implicit insurance and underwriting for loans and investments made by Spanish banks, or Italian banks or French banks.

And another word of caution:

Banking-union lite has probably surmounted its biggest hurdle, with last night's agreement of finance ministers. But it cannot become a reality until approved by Germany's parliament. Recent history indicates it would be foolhardy to bank the acquiescence of German parliamentarians in advance of the fact.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +11

    Comment number 51.

    @48.KURGANCODE
    ..It is my belief that this was the plan all along & the reason countries like Greece & Italy were allowed to run up enormous debt. It was a trap

    No, your're making the common mistake of dramatically underestimating the economic incompetance of neo-conservatives/liberals, particulary in currency design & management

  • rate this
    +3

    Comment number 50.

    @24.democracythreat
    .. That is not fiscal union, it is merely moving regulation from member states to Brussels

    thats all this tries to do, a common regulatory system to ensure a countries banks are not out of regulatory step & as a result in a position to drag that country down when an economic shock hits.
    fiscal union is supposed to come from the fundamentally flawed Euro Plus Pact (SGP mark2)

  • rate this
    -2

    Comment number 49.

    45.Universityoflife
    @ 36. nautonier

    "the sooner the UK can recover as a global maritime trading nation"

    That's not going to happen any time soon buddy. We also blew that one years ago.

    +
    UK is a weakened global maraitime trading nation but has been ignored & become run-down by lack of investment, strategy, planning, policies, infra-structure, training etc

    UK can recover maritime

  • rate this
    -2

    Comment number 48.

    Britain should have nothing to do with this thinly veiled EU attempt to force a United States of Europe. They will not be satisfied with a banking union & it be followed by political union & a dictatorship run by the likes of Baroso & van Rumpey.
    It is my belief that this was the plan all along & the reason countries like Greece & Italy were allowed to run up enormous debt. It was a trap.

  • rate this
    +1

    Comment number 47.

    Re your last para Robert - so we may yet be saved............
    BY THE GERMANS!

    Banks support failure, they have not suffered much after the crash. BUT (not being Amazon) they produce money so we can pay benefits to the poor!!

    and the Germans want the financial centre to be Hamburg.

  • rate this
    +1

    Comment number 46.

    Irrespective of any new rules eurozone states will not again go to the brink of bankruptcy as a result of the recklessness of their respective banks - for a generation. After which the rules will have been changed anyway. This is a "horse bolt close door" situation. Likewise the double majority lock will get slowly watered down. We must always be ready to exploit these changes.

  • rate this
    +6

    Comment number 45.

    @ 36. nautonier

    "the sooner the UK can recover as a global maritime trading nation"

    That's not going to happen any time soon buddy. We also blew that one years ago.

  • Comment number 44.

    All this user's posts have been removed.Why?

  • rate this
    +4

    Comment number 43.

    @26.fallingTP
    In many ways the UK has more in common with the US than with the rest of Europe:
    > A politically influential banker class
    > The highest prision population per-capita in Europe
    > The most American companies on the Main Street

    The thing is, in the EU the UK is one amongst equals with the largest countries. With the US, it's just a willfull lapdog

    Post-Empire, the UK is not special

  • rate this
    -2

    Comment number 42.

    I am surprised what no one has criticized the E.U. for "Kicking the can" or have you all finally realised that it is another brick in the wall.

  • rate this
    -1

    Comment number 41.

    "The EZ, especially in an expanded form, will be a powerful caucus in the EU influencing many tangential and economic policy issues."

    Sounds exactly like some of the incomprehensible stuff that comes out of Brussels

  • rate this
    0

    Comment number 40.

    @ 33. chiptheduck

    Re @ No1
    Someone who wants to climb out of the lifeboat and back on to the Titanic. Amazing!

    So Sterling is in a hole and you want to retain sovereignty of the shovel

  • rate this
    +1

    Comment number 39.

    Possibly a small step in the right direction for EZ. No more, no less.

    All has the stable door feel about it - some of the EZ members will have to leave ultimately

  • rate this
    +2

    Comment number 38.

    I would like to see this double majority thing actually work before concluding that the interest of UK will be preserved. Not ignoring that the interest of the UK is not necessarily the same as the interest of the banking oligopoly and probably is rather different. The EZ, especially in an expanded form, will be a powerful caucus in the EU influencing many tangential and economic policy issues.

  • rate this
    +1

    Comment number 37.

    Here comes the UK (again). UK won't cede its national banking supervision powers to the ECB. I don't understand this what with the libor, money laundering, etc. If any huge investment banks need supervision, I would suspect that many sit right smack in the middle of the Longon Financial Zone.

  • rate this
    +1

    Comment number 36.

    UK will never be an equal partner in the EU on banking or anything else - but is just big enough & as a net EU importer is big enough for the EU not to be able to ignore us.
    Time to realise that the 22 miles of water 'English Channel' is just enough for continental discrimination - the sooner UK puts itself outside of EU mess - the sooner the UK can recover as a global maritime trading nation

  • rate this
    -5

    Comment number 35.

    If it's fine ants shall confidence they want Jesus Christ doesn't give it them. its just a spoonful of sugar probably has anyone really changed their ways not likely. Every investor should work one project at a time and go into it knowing the risks. You will only make money if as an expert in your field with technical skills doing the work yourself. Economics means you can trade honest money.

  • rate this
    +2

    Comment number 34.

    @21 Busyp right on see
    http://www.businessweek.com/news/2012-12-12/riksbank-adds-15-billion-to-reserves-to-safeguard-bank-system
    sweden which like UK is in EU but not in monetary union is experiencing the turbulence of european financial woes.
    any action which restores stability has to be applauded.
    but the ESB is so weak as to be ineffective
    Vampire Squid wins break open the bolly

  • rate this
    +10

    Comment number 33.

    @1.John_from_Hendon

    We do need the establishment to decisively move the Nation towards joining the Euro asap. We must break the banker stranglehold on the Nation.
    ==
    Blimey! Someone who wants to climb out of the lifeboat and back on to the Titanic. Amazing!

  • rate this
    0

    Comment number 32.

    One question to this new "supervision body". Where will the qualified, bank understanding staff come from ?
    As the body is to be made up by technocrats from Frankfurt/Brussels, without a basic understanding of banking, is this not just another level of technocrat regulations worth; except to external solicitor companies to find ways around these new regulations?

 

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