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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 191.

    The EU 2012 solution was to reduce deficits by 2/3 tax hike and 1/3 spending cuts.
    Result - increasing unemployment - static spending - decreasing GDP.
    Whats another year - at least we have the EUROVISION to look forward to.

  • rate this

    Comment number 190.


    "...Leaf blowers are noisy smelly and consume fossil fuel..."


    Methinks thou protestest too mulch.

  • rate this

    Comment number 189.


    "..Blimey! Someone who wants to climb out of the lifeboat and back on to the Titanic. Amazing!..."


    Now that they've apparently patched the hole, the lights and heating are back on, who'd want to be alone, adrift in the dark -40C Arctic waters?

  • rate this

    Comment number 188.

    It seems more like a victory for France. French Banks all have really dodgy balance sheets and now the Germans get to bail them rather than the France.

  • rate this

    Comment number 187.

    One is struck by the absence of any discussion regarding the reduction of government spending and debt, or the problem of incompetence in government and widespread corruption.

    The prevailing view seems to be that the debt crisis is not about debt, but rather the consequence of poor administrative planning. Therefore, have a meeting, change the plan, and everything will be shiny.


  • rate this

    Comment number 186.

    Just seen tagline on Bloomberg "ECB will need at least 500 extra jobs".
    Add in indirects at 3 to 1 - maybe 2,000 people.

  • rate this

    Comment number 185.

    As the week before the Olympics - all problems magically disappear before the politicians go on their holidays - 3 weeks this Christmas.
    Strasbourg next trip, turn the heating on, garcon !

  • rate this

    Comment number 184.

    How can a bunch of Politicians from 17 different cultures and beliefs, gather for such a short time, and claim to have solved a problem which has been the core of the whole Eurozone financial collapse Their conclusions will take years not months to put into practice. The system is surviving on fantasy loans and IOUs today. The mountain of debt is just no longer sustainable. The pipedream is over

  • rate this

    Comment number 183.

    155. onothimagen said "positive money uses full reserve banking a hook to pull saps in ... Control of government spending by dictatorial quango working to a set of rules that would destroy the economic system. "

    So let's carry on allowing private banks to create every new pound as interest-bearing debt! What a great vision you have!

  • rate this

    Comment number 182.

    "Permit me to issue and control the money of the nation and I care not who makes its laws."

    Mayer Amsched Rothchild, a prominent European banker in the eighteenth century

  • rate this

    Comment number 181.

    JFM "pete-m Your hatred filled millions of graves with Europe's children. We MUST live with our friends and neighbours "

    Well I did not read pete-m's comment as being fuelled by hatred.

    It is simply not true that we must live with our friends and neighbours. We can be good and trustworthy neighbours without moving in with them or meekly agreeing to every demand they make

  • rate this

    Comment number 180.

    BusyP We stopped being a soveriegn nation many years ago when we handed the keys to our "independent" nuclear weapons to the USA. We tsill have to get US permission to fire it. Perhaps we should send them the bill for the next replacements!

  • rate this

    Comment number 179.

    One of these days the EU will throw us out of the club and then the Europhobes will have something real to whinge about, i.e. rising taxes, higher cost of imports, restrictions on exports, additional 1 million out of work, no protection for workers. A loss of a great number of employment and social rights. Be very careful what you wish for.

  • rate this

    Comment number 178.

    Sarah There are in fact over 320 "banks" in Europe, depending on the definition of a bank. However there are far less "issuing" banks, i.e. those allowed by statute to issue currency. The Bank of England is 1, the Bank of France another. A lot of so called banks are just licenced deposit takers who borrow, lend and are supposed to invest in the markets.

  • rate this

    Comment number 177.

    The EU are playing carch up.

    That's going to be one heck of a bad bank resting on the purse strings of the taxpayers.

    It would be reassuring if they knew what they were doing but I guess this is a new can they've found to kick down the cul-de-sac.

  • rate this

    Comment number 176.

    BluesBerry Agreed . The US will never be in a postion to meet any banking standards regarding capital, because the US no longer has tangible real assets. Cranking up the fed printing presses doesn't produce capital as those of us who decry fractional reserve fraud no, the US is just "printing" more debt.

  • rate this

    Comment number 175.

    Not sure why everyone still dreaming about a Euro transfer union.
    It will never happen.German constitutional court made very clear what
    the limits are.

  • rate this

    Comment number 174.

    By 'inherited democracy' I refer to political dynasties.
    My reference to Anders Brevick had a serious point.
    If people believe one bad leader will be immediately replaced their child, they act from desperation.
    Name your own examples.

  • rate this

    Comment number 173.

    JustBKO @153
    Not so much "specious"
    Rather, naive
    On "Who decides?"

    Enthusiasts for 'positive money' see the power ceded to bankers - beyond the dreams of alchemy - reckless creation of anti-democratic 'command economy', treasonous betrayal of humanity to Mammon

    However licensed, credit would be self-regulating if in Equal Partnership

    Democracy - meangful Equal Democracy - is the key

  • rate this

    Comment number 172.

    No168 Ib,
    'inherited democracy'
    The above is an interesting concept, can you explain what you mean?
    If I remember right Brevick was a racist thug that murdered a large number of innocent children and attempted to bomb and slaughter his fellow citizens.
    Am I being unfair in getting the impression that you have a fairly flippant approach to such activities.


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