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European banking union must not cut across UK-based reform, says expert

Out-Law News | 14 Sep 2012 | 4:24 pm | 3 min. read

Proposals to create an integrated bank supervision system across the European Union must not cut across banking reforms currently being undertaken in the UK if London is to maintain its status as Europe's global financial hub, according to a banking law expert.

Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the European Commission called on the EU's other decision-making bodies to adopt its proposals by the end of the year. The Commission has proposed the introduction of a Single Supervisory Handbook, developed by the European Banking Authority (EBA) to ensure supervisory coherence across all 27 member states, as well as a single supervisory mechanism (SSM) overseen by the European Central Bank (ECB) for banks in the eurozone.

"Everyone will be interested to see how 'voluntary' the proposals will be for non-euro countries," Anderson said. "In addition, it is very important for London as Europe's global finance centre that the banking supervision proposals do not cut across the banking reforms currently being undertaken in the UK. For example, any EU-wide bank ring fencing proposals will be detrimental to UK banks if they are significantly different to those proposed by the Vickers Report."

Michel Barnier, Internal Market Commissioner, said that the ECB's role under the new SSM would be to make sure that eurozone banks "stick to sound financial practices". A single supervisory system would, he said, make it less likely that taxpayers' money was used to bail out banks.

"Banking supervision needs to become more effective in all European countries to make sure that single market rules are applied in a consistent manner," he said. "We have proposed a mechanism to separate supervision from monetary policy within the ECB, and made sure that the ECB will be accountable to the European Parliament for supervisory decisions."

The proposals were welcomed by the European Parliament in a resolution voted on Thursday, however MEPs warned against the "apparent intention" by individual governments to "avoid developing a system that is transparent and democratically accountable". Member states, it said, were also pre-empting the Commission's role as initiator of the reforms by imposing a decision-making process which would exclude the European Parliament from deciding on one of the relevant texts.

The package of reforms will give the ECB strong supervisory powers over all banks in eurozone, with a mechanism allowing non-euro countries such as the UK to join on a voluntary basis. Only those states participating in the SSM would be entitled to direct recapitalisation of banks by the European Stability Mechanism (ESM) in the event of failure, the Commission said. Specific supervisory tasks that will be considered at a European level as a result of the new regulation (33-page / 213KB PDF) will include authorising credit institutions; compliance with capital, leverage and liquidity requirements and supervision of financial conglomerates, as well as other tasks "key to preserving financial stability and detecting viability risks of banks".

A further regulation (11-page / 139KB PDF) will align the EBA's existing regulatory powers to the new set-up for banking supervision, in order to ensure that EBA decision-making remains balanced and that the EBA continues to preserve the "integrity of the single market". The Commission has also published a communication (10-page / 61 KB PDF) outlining its overall vision for banking union, including the next steps involved in setting up a single resolution mechanism for cross-border banks, in addition to the unified bank resolution system proposed in June.

Cross-border banks operating within member states participating in the SSM and those outside of the arrangements will continue to be dual regulated under their existing supervisory coordination procedures, the Commission said. The ECB will act as "home and host authority" for all participating states in the same way as national regulators do at present to the extent that it takes over supervisory tasks.

Commission President José-Manuel Barroso said that the proposals were a "major step" to full banking union across the EU.

"We want to break the vicious link between sovereigns and their banks," he said. "In the future, bankers' losses should no longer become the people's debt, putting into doubt the financial stability of whole countries. We should make it a top priority to get the European supervisor in place by the start of next year."

The Commission hope to have the SSM in place by 1 January 2013, with a one-year phasing-in period to enable a smooth transition. The ECB will be able to decide to assume full supervisory responsibility over any bank from this date, it said, particularly those banks that have received or requested public funding. All banks of major systemic importance should fall under its supervision by 1 July 2013, the Commission said, while all other banks should be covered by 1 January 2014.