Chapter 6: Summary Of Conclusions
Chapter 1: Introduction
143. We regret that it has taken so long for
European leaders to bring forward concrete proposals to deal with
the systemic deficiencies in the design of EMU. We welcome the
necessary and long-overdue steps that have now been taken towards
the introduction of a banking union. The June 2012 European Council
was a watershed in acknowledging the imperative need to break
the vicious cycle between banks and sovereign states. Yet the
path to banking union will be far from straightforward. (para 13)
144. The three-pronged approach, outlined in
the June 2012 report, Towards a Genuine Economic and Monetary
Union, of a Single Supervisory Mechanism, a common resolution
mechanism and a common deposit insurance scheme, constituted a
firm and effective foundation on which to base the banking union
proposals. This coherent model has already been undermined by
political pressure, led by Germany. We regret that the controversial
nature of the European resolution scheme, and, in particular,
the European deposit insurance scheme, means that it is politically
unrealistic to expect all three elements of the banking union
to be taken forward quickly or in a united manner. (para 17)
145. In any assessment of the banking union proposals
it is necessary to keep in mind the concept of variable geometry.
These significant reforms will impact upon euro area and non-euro
area Member States, and the banks and other credit institutions
that operate within them, in different ways. Non-euro area Member
States themselves will not approach the proposals in a uniform
manner: it is not clear that many will follow the UK in staying
out of banking union. (para 21)
Chapter 2: The Single Supervisory Mechanism and
the role of the ECB
146. Given the systemic weaknesses in the euro
area banking sector that the financial crisis has brought to light,
a system of single banking prudential supervision is now urgently
required. The significance of this proposal as a first step towards
a full banking union should not be underestimated. The following
questions need to be addressed:
· Is it appropriate for the ECB, as is proposed,
to take on prudential supervisory tasks and, if so, what will
the impact be on its monetary policy responsibilities?
· What will be the impact on the ECB's governance
structure?
· Which banks should be directly supervised
by the ECB, and what will be the impact on the role of national
supervisors?
· What accountability mechanisms need to
be put in place?
· What will be the impact on non-euro area
Member States?
· What is a realistic timetable for these
reforms to be introduced?
· Do these reforms require treaty change?
(para 27)
147. There is an active debate about the appropriateness
of a central bank taking on supervisory functions alongside its
core monetary policy role. The US and the UK themselves are moving
towards drawing such functions together in one organisation, and
the majority of national central banks within the euro area already
do so. A Single Supervisory Mechanism is vital if confidence in
the euro area is to be restored. Giving this responsibility to
the ECB is the only viable option. However this would represent
a momentous step, creating a significant concentration of power
in one institution, with huge implications for the ECB's role.
Given the ECB's overriding focus on the euro area as opposed to
the EU-27, it would also have consequences for the shape of the
EU as a whole. (para 34)
148. There should be neither a conflict of interest,
nor a perception of a conflict of interest, between the ECB's
supervisory and monetary policy tasks. We recognise the
difficulties in designing a structure that overcomes this dilemma
whilst at the same time complying with the legal requirements
of the Treaty on the Functioning of the European Union
(TFEU) and the ECB Statute. As negotiations progress, the following
principles should be observed:
· The need for full separation of personnel
between the supervisory and monetary policy tasks;
· The need to grant the proposed Supervisory
Board wide decision-making autonomy;
· The need to minimise the role of the Governing
Council in relation to supervision as far as is possible under
the Treaty framework;
· The need to ensure that it is clear which
body within the ECB has ultimate responsibility in a crisis.
Without such principles the credibility of the Single
Supervisory Mechanism will be significantly undermined. Whether
these principles can be observed without recourse to treaty change
is open to question. (para 39)
149. It is unrealistic to expect the ECB to engage
in intensive supervision of all 6000 euro area banks. Yet the
dangers created by the significant interdependence of banks that
came to light during the financial crisis demonstrate that it
is not only large credit institutions that pose a threat to the
financial sector. A sensible compromise would be for the ECB to
direct the conduct of supervision by national supervisors, and
for the ECB itself to focus on day-to-day supervision of only
the largest cross-border and systemically important banks, but
with the power quickly to assume responsibility for the supervision
of smaller banks as required. (para 47)
150. This model can only work if there is close
and positive cooperation between the ECB and national supervisors.
The ECB must also have the means to eliminate national supervisory
bias where it occurs. The proposed supervisory arrangements must
be stress-tested against conditions of acute crisis, setting out
clearly who is in charge, the relationship between the parties
involved, and how the chain of command will operate. Given that
a banking crisis originating amongst participating Member States
would inevitably spread to London and the single market as a whole,
the Government must ensure that the UK is able to influence decisions
on the design of the supervisory framework. (para 48)
151. The ECB will become an exceptionally powerful
institution if it takes on the proposed supervisory powers. Four
principles of accountability need to be borne in mind:
· That the ECB should be fully answerable
to the Council and European Parliament for the supervisory decisions
that it undertakes;
· That an effective, calibrated and streamlined
mechanism of accountability to national parliaments should be
established, in particular in relation to individual supervision
decisions that have a significant impact on an individual Member
State's banking sector. It must be for national Parliaments to
set out how any new accountability structures and frameworks should
operate in practice;
· That an effective appeals system should
be established within the ECB, with a timely and appropriate system
of external legal challenge;
· That the accountability mechanism should
be able to operate speedily and effectively at moments of acute
crisis. (para 56)
152. Judged by these principles, the accountability
provisions in the original proposals are patently weak. The ECB
must retain full independence in the exercise of its monetary
policy role, as well as operational independence in relation to
the supervisory function. We also acknowledge the legal constraints
presented by Article 130 TFEU. Nevertheless, the case for a strong
accountability mechanism is overwhelming. We are heartened by
the ECB's acknowledgement that stronger accountability provisions
are required. (para 57)
153. Many non-euro area Member States may wish
to participate in the Single Supervisory Mechanism. The UK has
made clear that it will not do so. It is important that those
non-euro area Member States who do wish to participate enjoy de
facto equality with euro area Member States in the ECB decision-making
process. The constraints imposed by TFEU may mean that this ultimately
requires treaty change. Interim arrangements need to be devised
that are satisfactory to those non-euro area Member States who
wish to participate. (para 65)
154. Given the complex and controversial nature
of the Single Supervisory Mechanism proposals, the timetable for
reaching agreement on the proposals by the end of 2012 was wholly
unrealistic. The revised aim of agreeing a legislative framework
by the end of 2012 remains extremely ambitious, and, even if achieved,
will leave significant questions as to how the mechanism will
work in practice still to be addressed. The rushed timetable was
a direct consequence of the political decision to link implementation
of the SSM with the perceived need urgently to recapitalise the
Spanish banking sector. This link is a contentious one which constrains
the ability to assess the SSM proposals on their own merits. The
need to agree legislation quickly does not obviate the requirement
for effective scrutiny. The decline in Spanish bond yields since
the ECB began to intervene in the secondary markets has eased
the immediate pressure for recapitalisation, yet Spain's prospects
remain uncertain. The banking union proposals must not become
an excuse for inaction on that front. (para 72)
155. In its design of the proposals the Commission
has been constrained by the need to avoid necessitating treaty
change. We remain to be convinced that an effective mechanism
can be designed within existing treaty constraints. European legislators
may ultimately have to decide whether treaty change is a price
they are willing to pay in order to bring about banking union.
Adopting deficient and counterproductive legislation by way of
compromise would be the worst of all possible outcomes. (para 75)
Chapter 3: The impact of banking union on the
EBA and the ESRB
156. 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. (para 83)
157. 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. (para 92)
158. 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. (para 94)
159. 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. (para 97)
Chapter 4: Further steps towards banking union
160. The Recovery and Resolution Directive is
a necessary step towards strengthening the single rulebook. However,
the harmonisation model that it encapsulates is no longer sufficient
to ensure the effective operation of the euro area banking sector.
While there is a need for further steps towards effective banking
union within the euro area in the form of a single resolution
mechanism, it is vital that these steps do not risk a deepening
split within the single market. (para 105)
161. We recognise the political and technical
difficulties in moving towards a single resolution mechanism.
However, it is a necessary step if the destructive link between
banks and sovereign states is to be decisively broken. (para 114)
162. We understand the controversial nature of
the proposal for the introduction of a common deposit insurance
scheme, given that it would represent a significant step towards
debt mutualisation. Nevertheless, for banking union to succeed
and for the euro area to thrive, some form of common insurance
scheme for the euro area would make sense. The case for such a
scheme should continue to be made in the coming months. (para 119)
163. While the case for some form of structural
separation within the banking sector may be attractive,
the devil is in the detail. There remains considerable uncertainty
as to how the ringfence proposed in the Liikanen report will function,
and questions remain about its compatibility with the recommendations
of the UK Independent Commission on Banking (the Vickers report).
The Commission is considering the Liikanen report and we will
scrutinise its legislative proposals as and when they emerge.
In the meantime we look forward to receiving the findings of the
Parliamentary Commission on Banking Standards on its consideration
of these issues. (para 127)
Chapter 5: The impact on the UK and the single
market
164. The UK's decision not to participate in
the banking union proposals could have significant consequences.
While the precise impact on the UK financial services industry
is difficult to predict, a degree of marginalisation will be inevitable
as the euro area (and possibly other Member States) take steps
towards deeper integration. We fear that the Government's assurances
that the pre-eminence of the UK financial sector will persist
may prove misplaced. We urge them to do everything necessary to
ensure that London's leading position is not imperilled by the
move towards a banking union. (para 133)
165. While the banking union proposals are essential
to restore the credibility and integrity of the EU banking sector,
we are deeply concerned that closer integration of an inner core
of Member States could threaten the integrity of the single market.
It is inevitable that euro area countries and other participating
Member States will converge towards common positions in a number
of areas and this is only likely to increase should further steps
towards fiscal and, ultimately, political union, be taken. This
may place an EU-27 single market under severe strain, in particular
if a majority of non-euro Member States choose to participate
in banking union. The implications for the UK's position within
the EU are troubling. We urge the Commission, as champion of the
single market, to do all it can to preserve this most fundamental
element of the EU project. The UK Government need to do likewise.
(para 138)
166. Even though the UK is choosing not to participate
in the banking union proposals, the issues that we have examined
in this report will have a significant impact on this country.
The UK must retain an influential voice in discussions of the
future of the EU financial sector. This is necessary not only
for the financial health of the UK financial sector but, given
London's status as the world's leading financial centre, for the
EU as a whole. We urge the Government to ensure that the UK is
able to exert a positive influence on these discussions. While
we do not seek in this report to analyse the policies which the
Government should pursue to achieve these ends, we would emphasise
that it is our intention to report further on these matters and
other aspects of the future development of European banking union
during 2013. UK isolation in debates of fundamental importance
not only for the euro area, but for the single market and the
UK financial sector itself, would be disastrous. (para 142)
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