House of Lords - European Banking Union: Key issues and challenges

European Banking Union: Key issues and challenges - European Union Committee Contents

Chapter 3: The Impact Of Banking Union On The EBA And The ESRB

76. The second element of the Single Supervisory Mechanism proposals is the proposed Regulation amending the existing Regulation establishing the European Banking Authority (EBA) (referred to as the "the EBA Amending Regulation"). The EBA was established on 1 January 2011 and is a regulatory agency tasked with improving cooperation between national supervisors and continuing the development of a single rulebook for financial services in the EU. We considered its role in our July 2011 report, The EU Financial Supervisory Framework: an Update.[104]

77. The SSM proposals bring into sharp focus the role of the EBA. As an EU-wide institution, one of the EBA's fundamental objectives is to ensure the effective functioning of the single market.[105] The issues of how such a relatively small and newly-established body will interact with such an immensely powerful institution as the ECB, and the potential consequences for the integrity of the single market (which we consider in detail in Chapter 5), will become vital ones to address.

78. The main elements of the Regulation are set out in Box 4.

BOX 4

The main elements of the EBA Amending Regulation[106]

· In respect of its power to impose a binding decision to resolve a cross-border disagreement between supervisors or to require action in an emergency situation, the EBA could request the ECB to follow its decision but could not require it to do so. The ECB would be required either to comply or to provide adequate justification for non-compliance.

· Stronger decision-making powers would be given to an independent panel with respect to the EBA's powers relating to breaches of EU law and settlement of disagreements between supervisors. The three-person panel would be required to include at least one member from a non-participating Member State. The decision of the panel would be considered as adopted by the EBA Board of Supervisors unless it was rejected by a simple majority, which would be required to include at least three votes from participating Member States and at least three votes from Member States that were neither participating nor had entered into close cooperation arrangements with the ECB.

· The EBA Management Board would be required to include at least two representatives from Member States that were not participating and which had not entered into close cooperation arrangements with the ECB.

· The voting modalities with respect to EBA decisions on regulatory matters would not be changed. Such decisions would continue to be made on the basis of qualified majority voting in the Board of Supervisors.

The relationship between the EBA and the ECB

79. The impact of the ECB's enhanced role on the EBA was a concern for many witnesses. Mr Lannoo was sceptical about whether the EBA could exercise a mediation role between such powerful bodies as the ECB and the Bank of England without being squeezed. In his view, "we have to accept that the EBA will essentially become a standard-setting authority."[107]

80. Significantly, the EBA Chairman, Andrea Enria, agreed that there was a risk of the EBA becoming an "overarching umbrella which had no teeth". He warned that powerful supervisors would put pressure on the EBA to be allowed to tailor such rules to their own circumstances, resulting in a lack of convergence in supervisory practices.[108]

81. Others did not perceive such risks. Ambassador Boomgaarden described the ECB and EBA as "independent of each other so one is not dominating the other."[109] Mr Constâncio stressed that the ECB should be subject to the same procedure of mediation as any other supervisor.[110] Commissioner Barnier pointed out that the EBA Amending Regulation would still grant the EBA, in extreme circumstances, the power to impose a decision on a bank in the euro area.[111]

82. We have previously reflected on the resource challenges that the EBA faces.[112] Mr Enria told us that the EBA continued to be significantly understaffed to the extent that he questioned whether European leaders were seriously committed to its role.[113]

83. We are concerned that the Single Supervisory Mechanism proposals may seriously undermine the authority of the EBA in its relations with the ECB. It is important to maintain the distinction between the EBA's role in setting rules across the EU and the ECB's role in supervising their operation within the Single Supervisory Mechanism. The ECB has assured us that it should be subject to the same procedure of mediation as any other supervisor. We are concerned that the sheer weight of influence that the ECB would exercise would make parity of treatment difficult to achieve in practice. The EBA needs the necessary resources, capacity and authority if it is to hold effective sway over such a powerful institution, and European leaders must reaffirm their commitment to its role. The Commission's forthcoming Review of the European System of Financial Supervision must, as a matter of priority, identify ways to buttress the EBA's position as defender of the single market.

A) VOTING PROCEDURES

84. The ECB Regulation states that the ECB shall be exclusively competent "to coordinate and express a common position of representatives from competent authorities of the participating Member States when participating in the Board of Supervisors and the Management Board of the European Banking Authority, for issues relating to the tasks conferred on the ECB by this Regulation."[114] HM Treasury pointed out that this would effectively require participating Member States to caucus in adopting positions and voting in the EBA.[115]

85. Mr Constâncio agreed that "the logic of monetary union" would lead to euro area countries holding similar views.[116] However, Ambassador Boomgaarden did not feel that caucusing was inevitable, because "the dividing lines on most questions are not between eurozone and non-eurozone member states."[117]

86. The Commission envisaged that alterations to the voting modalities within the EBA could help to ensure that the ECB was not able to dominate the EBA decision-making process. In the instances where issues are currently adopted by simple majority by the Board of Supervisors, it was proposed that decision-making powers be conferred on an independent panel, with a strong reverse voting mechanism.[118] This was intended to ensure that the decisions prepared by the independent panel were adopted unless they were rejected by a simple majority, including by at least three votes of participating Member States and by three of non-participating Member States. Changes to the voting rules would only affect those decisions made through a simple majority (that is, 'one country one vote'). These decisions include those in relation to a breach of law, on the settlement of disagreements and on the election of the Management Board.

87. Mr Lamberts emphasised that preserving some form of veto power for the non-euro Member States would create a "perverse incentive because it would give them more decision-making powers by staying out than by being in".[119] Mr Enria also warned that this could impair decision-making within the EBA. In his view, there was a need to move away from the idea that "good regulations and technical rules in Europe can be done only through national bargaining".[120]

88. The situation is complicated when one considers the fluid position of the so-called 'Outs'. The Commission made a commitment to review the voting modalities in order to reflect any future changes in the number of Member States whose currency is the euro or whose competent authorities have entered into a close cooperation agreement, but gave little further detail.[121] Mrs Bowles felt that it was "very difficult to see the way through to a long-term solution that would work for the UK."[122]

89. The October 2012 European Council conclusions stated that "it is important to ensure a level playing field between those Member States which take part in the SSM and those which do not, in full respect of the integrity of the single market in financial services. An acceptable and balanced solution is needed regarding changes to voting modalities and decisions under the European Banking Authority (EBA) Regulation, taking account of possible evolutions in the participation in the SSM, that ensures non-discriminatory and effective decision-making within the Single Market."[123] Following the Summit, Mr Rathi confirmed that there was "still some way to go" in ensuring that non-participants' interests were taken into account.[124]

90. The Government have stressed that the EBA must continue to serve the whole single market, and its voting arrangements must reflect this need.[125] However the unlikelihood of the so-called 'Outs' taking a uniform approach to banking union means that this will be difficult to achieve in practice.

91. One potential solution would be to provide for voting strength within the EBA to be weighted according to the size of individual Member States' financial markets. Mr Persson described this as an interesting proposal. Although he argued that Germany would be supportive of such a mechanism within the ECB Supervisory Board (given the dominant position that they would hold), he did not think they would be so keen in the EBA context (where the UK would have the largest voting weight).[126]

92. It is in our view inevitable that there will be a convergence towards a single view within the EBA among Member States participating in banking union. This makes it imperative for non-participating Member States to have an effective voice, whilst at the same time ensuring that the decision-making process within the EBA does not become sclerotic. The EBA's voting arrangements must ensure that it is able to defend the interests of the single market as a whole. A fracturing of the single market must be avoided at all costs. It is however hard to envisage non-participating Member States having a permanent veto, given that their numbers may be small from the start, and may shrink further. In our view, there cannot be an equitable and effective resolution of this dilemma unless the voting arrangements within the EBA reflect the significance of individual Member States' financial markets within the single market as a whole.

B) ASYMMETRY OF BINDING MEDIATION ARRANGEMENTS

93. The Government also raised concerns about the proposed asymmetry in binding mediation arrangements in the Amending Regulation, in that "as an EU institution, the ECB cannot legally be bound by EBA decisions on binding mediation, and would be subject to a 'comply or explain'[127] arrangement, whereas the UK's (future) Prudential Regulation Authority (and other national regulators) would be bound by EBA decisions as at present."[128] Mr Rathi was clear that the proposal could not stand in its current form. He said that there were two ways to achieve symmetry: either subject everyone to the 'comply or explain' arrangement, or find a legal mechanism of binding the ECB into EBA decisions.[129] As we have seen, Mr Constâncio was clear that the ECB "will be bound in the same way as any other supervisor."[130]

94. There must be symmetry in the means by which the ECB and non-euro area authorities such as the UK's Prudential Regulatory Authority are subject to EBA decisions. A solution to this problem must be identified as a matter of urgency.

Macroprudential supervision and the ESRB

95. The European Systemic Risk Board (ESRB) was established in 2010, tasked with the responsibility of overseeing risk in the financial system as a whole (referred to as macroprudential supervision). This was in response to the recognition that supervisory arrangements should not only concentrate on the supervision of individual firms but also place emphasis on the stability of the financial system as a whole.[131] We examined its role in our July 2011 report, The EU Financial Supervisory Framework: an Update.[132]

96. The ECB Regulation stated that the ECB would have exclusive competence within the euro area over "countercyclical buffer rates and any other measures aimed at addressing systemic or macro-prudential risks in the cases specifically set out in Union acts".[133] Mr Persson predicted that, as a result, the ESRB would quickly become superfluous. Even now, he told us, "it can issue recommendations and monitor systemic risk, but it cannot really do anything." He argued that a strengthened ESRB could act as a counterweight to the ECB's "inherent incentive to look out for the interests of the eurozone."[134] Professor Lastra feared problems of co-ordination between the ECB, EBA and ESRB.[135] Mr Constâncio asserted, however, that the ESRB could issue recommendations to the ECB in the same way as to any other supervisor.[136]

97. The need for effective macroprudential oversight was an important lesson learned from the global financial crisis, and the ESRB continues to have a vital role to play. Insufficient consideration has been given to the effect of the Single Supervisory Mechanism proposals upon its position. There must be full analysis of the impact of these proposals on the ESRB in the context of the Commission's forthcoming Review of the European System of Financial Supervision.

104 20th report (2010-12), The EU Financial Supervisory Framework: an Update (HL 181). Back

105 EBA Work Programme 2013:
http://www.eba.europa.eu/cebs/media/aboutus/Work%20Programme/EBA-BS-2012-163-FINAL--EBA-work-programme-for-2013-.pdf. Back

106 COM (2012) 512. See EMs 13682/12, 13683/12 and 13854/12, op. cit. Back

107 Q 61. Back

108 Q 89. Back

109 Q 187. Back

110 Q 164. Back

111 Q 102. Back

112 The EU Financial Supervisory Framework: an Update, op. cit. Back

113 Q 90. Back

114 COM (2012) 511, op. cit. See Article 4(1) (l). See Appendix 7 for further details on the role and operation of the EBA. Back

115 EMs 13682/12, 13683/12 and 13854/12, op. cit. Back