I will do whatever it takes (and so he did)

Europeans will vote on the future of the European Union soon enough, but in the meantime one of the biggest changes in the history of the Union is already in motion: the banking union.

There are still a lot of unresolved questions and great difficulties the EU will have to solve if the banking union is to become a reality any time soon. But the first big step towards it, the Single Supervisory Mechanism (SSM), will come into action as soon as this autumn.

The ECB will undertake the task of coordinating the SSM by directly supervising significant credit institutions and working alongside national supervising authorities to oversee less important institutions.

According to article 6.4 of the Regulation of the European Parliament on the SSM, an institution will be considered significant if: the total value of its assets exceeds 30 billion Euros, if their assets account for more than 20% of a participating state’s GDP and if they have received or requested public financial assistance directly from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF). Also, the ECB might on its own initiative consider an institution as relevant due to its cross-border activities.

The agreement over this supervising mechanism is a great triumph for the Union but it raises new questions. For instance, what can the ECB do when drastic measures such as shutting down a bank are required? The necessity of a single resolution fund for failed banks and single deposit insurance to prevent bank runs are indispensable to be truly done with the profound contradictions in the single currency. However an agreement on these mechanisms is still far, especially because of the enormous costs they would suppose for the Member States.

But this two missing pillars of the Banking Union are not the only credibility problems the new SSM will be facing. The acting of the ECB as an independent body can be questioned because of the leading role it has assumed in weathering the storm of the Euro crisis.

The European Parliament asked the ECB what its role in the Troika was. It answered that it was to give advice and to work in liaison with the Commission to assess the economic conditions that accompanied the financial aid bailed-out countries received.

But that is probably an understatement. Troika literally means a government or alliance between three members with the same amount of power and consequently the ECB has played a key role in designing and revising the measures bailed-out countries had to apply.

In fact, according to information appearing in Die Welt and Sueddeutsche Zeitung last march there are doubts within the ECB about continuing in the Troika because it could create a conflict of interests.

Furthermore, ECB has been shielding German and French banks, both greatly exposed to Greek and other bailed-out countries’ sovereign debt, to avoid their default. With Greek’s debt writing off in 2012, some of this bad debt went out of the system. But some is still there and it will be now ECB’s job to point that out and call for the banks to assume the loss of the money they still have in Greek bonds. Article 18 of the Commission Proposal for the new SSM, as approved by the European Parliament, states that credit institutions should fully internalise all costs caused by their activities, including that of investing in bad sovereign debt.

Also, it will be the ECB rather than the national supervising systems the one supervising and telling the big credit institutions of bailed out countries what to do. That would put the ECB on both sides of the table in the negotiation and monitoring of measures between the Troika and bailed out countries and banks.

There has also been much discussion around the stress tests the ECB is to set in motion before the starting up of the SSM. The ECB needs to set new and high standards for Euro zone banks if it wants markets to trust its supervising role at all, but it is uncertain how far it will go. For it will be ECB’s job to find a solution for those banks that reveal as unviable from the results of these stress tests. All this without counting on a single resolution fund or other automatic funds set for this purpose.

Besides, the ECB has been trying hard to get credit flowing towards companies in depressed economies, especially by maintaining really low interest rates consistently. However, now higher legal deposits might be required in order to limit some banks’ risk exposure. That will raise interest rates and restrict access to credit; creating conflicting priorities within the ECB as supervisor on one side and as central bank, responsible for credit flow on the other.

It all comes down to how hard the ECB has worked to ensure the survival of the Euro and the future of the European Union. A year and a half ago, Mario Draghi pledged to do whatever it took to save the euro, and that changed everything, for better and for worse. Perhaps it was the only way around the crisis of the single currency but it is futile to deny that this has compromised the ECB’s so called independence. If the point comes where the ECB has to honour its position as supervisor or defend the interest of the Union, one will wonder. Maybe the time has come for the ECB to step down as part of the Troika and concentrate on its new role.

More on the new SSM:
A measly triumph


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