Twenty-ninth Report of Session 2012-13 - European Scrutiny Committee Contents

17   Banking Union




COM(12) 512




COM(12) 511




Draft Regulation amending Regulation (EC) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards its interaction with Council Regulation (EU) No. .../... conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions

Draft Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions

European Central Bank Opinion on a draft Council Draft Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a draft Regulation amending Regulation (EC) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) (CON/2012/96)

Legal base(a) Article 114 TFEU; co-decision; QMV

(b) Article 127(6) TFEU; consultation; unanimity

(c) —

Deposited in Parliament(c) 18 December 2012
DepartmentHM Treasury
Basis of consideration(a) and (b) Minister's letter of 12 January 2013;

(c) EM of 9 January 2013

Previous Committee Report(a) and (b) HC 86-xiv (2012-13), chapter 1 (17 October 2012);

(c) None

Discussion in Council(a) and (b) 13 December 2012;

(c) None planned

Committee's assessmentPolitically important
Committee's decision(a) and (b) Cleared after debate on the Floor of the House[68]

(c) Cleared


17.1  In recent years various measures have been discussed, and some introduced, to strengthen economic governance in the eurozone and in the wider EU. Much of this activity has been concerned with countering the present eurozone difficulties. Measures advocated have included a "banking union". In this context in September 2012 the Commission proposed the first stage of a Banking Union, involving two draft Regulations. One, document (b), would confer specific tasks on the European Central Bank (ECB) concerning policies relating to the prudential supervision of credit institutions — a Single Supervisory Mechanism (SSM). The other, document (a), would amend consequentially the Regulation establishing the European Banking Authority (EBA). These documents were cleared from scrutiny following debate on the Floor of the House in November 2012.[69]

The Minister's letter

17.2  The Financial Secretary to the Treasury (Greg Clark) writes now to update us on the progress of negotiations on the Banking Union, saying that:

  • an agreement on the proposals for the SSM was reached by the Council on 13 December 2012, after all-night talks between EU finance ministers;
  • the Chancellor represented the UK and, with likeminded allies, secured an agreement that will preserve the single market and protect the interests of those remaining outside the Banking Union;
  • the European Parliament will now be consulted on the ECB Regulation, document (b) and the trilogue process has commenced in relation to the amending EBA Regulation, document (a);
  • the Council's progress was endorsed by Heads of Government at the European Council on 13-14 December 2012;
  • the European Council also concluded that it was imperative to break the vicious circle between banks and sovereigns, and committed that "further to the June 2012 euro area Summit statement and the October 2012 European Council conclusions, an operational framework, including the definition of legacy assets, should be agreed as soon as possible in the first semester of 2013, so that when an effective single supervisory mechanism is established, the European Stability Mechanism will, following a regular decision, have the possibility to recapitalise banks directly. This will be done in full compliance with the Single Market"; and
  • the Conclusions also noted the Commission's intention to adopt a proposal for a Single Resolution Mechanism for Member States participating in the SSM during the course of 2013 — this high-level commitment will ensure that the remaining elements of the Banking Union remain on the political agenda in 2013.

17.3  The Minister comments that:

  • the Government has worked hard to ensure that the City of London's pre-eminence is maintained;
  • Ministers have been very closely involved in these negotiations, including on technical details for provisions that could have a significant impact on UK financial services; and
  • consequently, as part of the Council agreement, the Government has secured a number of strong protections against potential discriminatory action against the UK's financial services industry.

17.4  He then describes those protections as follows.

17.5  The Minister tells us that one of the most significant protections that the Government has secured is the principle of double majority voting in relation to key decisions taken by the Board of Supervisors of the EBA, saying that this is a landmark agreement that demonstrates how greater integration between eurozone Member States need not mean the fragmentation of the single market in future. He says that this principle will be applied as follows — for key decisions, including those relating to binding technical standards that will apply to firms across the single market, current voting arrangements will be supplemented with a requirement that any necessary majority must include a simple majority of members of the Board of Supervisors representing Member States participating in the SSM and a simple majority of members representing non-participating Member States. The Minister comments that:

  • this protects against the risk that participating Member States will systematically impose a common view on other Member States by requiring a majority of those outside the Banking Union to approve decisions in the EBA; and
  • there will be a review of voting arrangements if and when there are four or fewer non-participating Member States and a report would be submitted to the Council, the European Parliament and the European Council for discussion.

17.6  Next the Minister says that:

  • the Government has secured a non-discrimination clause that will protect the single market;
  • this requirement, stating that "no action, proposal or policy of the ECB shall, directly or indirectly, discriminate against any Member State or group of Member States as a venue for the provision of banking or financial services in any currency", is a significant achievement and guards against any restriction of the UK's role as a financial centre in the single market, including on euro-denominated banking services;
  • there is also an assurance that the scope of the new SSM will only cover banking and not other financial services institutions such as central counterparties, which are explicitly excluded.

17.7  The Minister continues that:

  • the Government has secured agreement to the principle that there must be symmetry of treatment between the ECB and other supervisors, including the Prudential Regulation Authority;[70]
  • all competent authorities will be treated equally for the purposes of EBA mediation between supervisors, and all competent authorities will have the same powers of intervention within and beyond their jurisdictions; and
  • the independence of the EBA from the ECB has also been preserved as a result of the omission of the provision enabling the Chair of the EBA to participate as an observer on the ECB's Supervisory Board and there is agreement that appointments in the EBA (including its Chair and Vice-Chair) must be geographically balanced.

17.8  The last protection the Minister tells us about is that the agreement provides a statutory footing for a bilateral memorandum of understanding between the ECB and the Prudential Regulation Authority, which will secure coordination of supervision of cross-border banks and activities.

17.9  The Minister comments that:

  • the Government's priority throughout these negotiations has been to ensure the unity and integrity of the single market is maintained;
  • consequently its focus has been on securing protections for those Member States, like the UK, which will remain outside the Banking Union; and
  • the Government, has however, also been at the table for discussions on the ECB Regulation — it considers the deal reached is fair and balanced.

17.10  The Minister comments further on the ECB Regulation that:

  • it is important that there are governance arrangements within the ECB that clearly separate monetary and supervisory functions, as well as provide for equality in decision-making between eurozone and non-eurozone Member States that are participating;
  • the ECB Regulation aims to achieve this through an express requirement for the ECB to conduct its supervisory tasks separately to its other tasks and through establishment of a Supervisory Board, with decisions of this board deemed adopted unless they are actively rejected by the ECB's Governing Council;
  • membership of the Supervisory Board will consist of representatives from national competent authorities in each participating Member State, as well as a Chair, Vice-Chair and four representatives of the ECB, all of whom will have voting rights;
  • there will also be a review panel to ensure the procedural and substantive legality of decisions taken by the ECB and ultimately decisions of the ECB may be referred to the European Court of Justice under Article 263 TFEU;
  • the ECB will also have obligations towards national parliaments — parliaments in participating Member States may invite the Chair or a representative of the Supervisory Board to participate in an exchange of views in relation to the supervision of credit institutions in that Member State together with a representative of the national competent authority; and
  • all these measures have been agreed without recourse to Treaty change.

17.11  The Minister concludes that:

  • these details, of course, remain subject to the outcome of discussions between the Council and European Parliament;
  • the Council has agreed that the two Regulations must be agreed together; and
  • this will maximise (presumably as the ECB Regulation is subject to unanimity) the Government's ability to ensure the whole package represents a good deal for the eurozone and a good deal for the UK and the whole single market.

The new document

17.12  In this Opinion, document (c), the ECB comments on the two draft Regulations, welcoming the proposals to establish an SSM and to make amendments to the EBA Regulation. The ECB says that:

  • it recognises that the EU architecture needs to be strengthened in order to break the link between banks and sovereigns and to reverse financial market fragmentation in the eurozone;
  • the SSM should help to restore confidence in the banking sector, revive interbank lending and cross-border credit flows, promote the effective application of the single rulebook and advance supervisory convergence;
  • Article 127(6) of the Treaty is an appropriate legal basis for the proposal to establish the SSM; and
  • it supports an integrated financial framework and notes that a single resolution mechanism, focused on a European Resolution Authority, is a necessary complement to the SSM and that clear deadlines for its establishment should be agreed.

17.13  The ECB sets out six principles with which the SSM should comply, outlines its vision for the mechanism and calls for further detail in some areas:

  • effectiveness — the ECB should be able to carry out the tasks assigned to it effectively and rigorously and without risks to its reputation. It therefore welcomes the specific tasks it has been allocated, as well as the powers which will enable it to discharge its duties;
  • independence — the ECB will ensure that its role in the SSM will not compromise either its performance in other areas or its institutional standing;
  • separation between monetary policy and supervision — effective governance structures within the ECB will be needed in order to ensure that monetary policy and supervision remain strictly separate and to prevent conflicts of interest;
  • cooperation with national supervisory authorities — the ECB will need access to the knowledge, expertise and operational resources of national supervisory authorities including access to in-depth qualitative and reliable quantitative information. The SSM should preserve the unity of the supervisory system at the same time as implementing appropriate decentralisation procedures;
  • consistency with the single market — the SSM and EBA must ensure that the new framework is consistent with the single market. This will be achieved by ensuring that Member States entering into close cooperation with the SSM do so with the same rights and obligations as eurozone Member States and ensuring that the governance structures and powers of the EBA provide equal treatment to national supervisory authorities and the ECB (while not compromising the ECB's independence); and
  • democratic accountability of the ECB — the ECB supports establishment of accountability and reporting mechanisms to cover its supervisory mandate under the SSM.

17.14  The ECB stresses the importance of the SSM being implemented over the course of 2013 and calls for further enhancements to the proposed SSM Regulation relating, for example, to sanctions, precautionary measures and the single rulebook, to help the ECB fulfil its supervisory tasks.

The Government's view of the new document

17.15  In his Explanatory Memorandum the Minister says that the Government has consistently supported a well-designed banking union as a contribution to resolution of the eurozone crisis and establishment of a SSM is a first step towards this.

17.16  The Minister comments further that:

  • the UK will not participate in the Banking Union;
  • the Government's priority is therefore to represent the interests of the wider single market and to ensure that the UK retains its influence over policy development and rule making, not least in the EBA;
  • in this respect the consequential changes proposed to the EBA Regulation are particularly important and the Government shares the ECB's view that the governance and powers of the EBA should secure equal treatment of national supervisory authorities and the ECB in its capacity as a supervisory authority;
  • the Government notes the ECB's view that it will be necessary for the functioning of the SSM for the ECB to ensure that national competent authorities of Member States participating in the SSM assume mutually consistent positions in the EBA;
  • to protect the single market it is therefore essential that voting arrangements in the EBA are amended to ensure that converging interests of the SSM do not override the needs and positions of non-participating Member States;
  • the Government welcomes the ECB's Opinion and its focus on the principles which it envisages will underpin the SSM — in particular it calls for further refinement of the proposal to address areas of uncertainty;
  • the ECB is right not to underestimate the task of establishing an SSM and how the various elements of this will work in practice — the current aim is for the ECB to assume in full the tasks conferred under the SSM on 1 March 2014 or 12 months after the entry into force of the ECB Regulation (whichever is later);
  • consistent with the ECB's Opinion, the Government notes that the SSM is the first pillar of a proposed banking union; and
  • the two remaining pillars are a single deposit guarantee scheme and a single resolution authority — the Government awaits legislative proposals from the Commission on both elements.


17.17  We are grateful to the Minister for this account of the Council outcome on the two draft Regulations. We draw it, and the ECB Opinion, which we clear from scrutiny, to the attention of the House as information on further developments in establishing the Banking Union.

17.18  In doing so, however, we ask the Minister to write back to us addressing how the concerns of the Council Legal Service over the legality of document (b) delegating the Treaty- based powers of the ECB to the SSM have been met. This was something which Members of the Committee raised in the Floor debate on 6 November 2012, and it is not clear to us from the Minister's letter how it has been resolved.

68   HC Debs, 6 November 2012, cols. 805-833. Back

69   Ibid. Back

70   In April 2013 the Prudential Regulation Authority, as part of the Bank of England, will become the UK's prudential regulator for banks, building societies, credit unions, insurers and major investment firms. Back

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Prepared 30 January 2013