The ECB would have wide ranging powers including the ability to shut down banks, carry out raids, fine them up to 10% of their annual turnover for not complying with regulations and require them to hold more capital.
In what Commission president, Jose Manuel Barroso called the first step to creating a banking union, all 6,000 plus credit institutions in the eurozone would on a phased basis come under the supervision of the ECB.
Acknowledging that this massive undertaking cannot be achieved by the Jan 1 deadline set for it, the plans envisage the ECB taking responsibility for those that have received or requested public funding.
All Irish banks are in this category and ECB sources confirmed they would be covered by this. From July all major systemic banks — up to 30 — will come under the ECB’s oversight and the rest by the end of 2013.
The plans propose a move away from the loose co-ordination between national regulators that has been blamed for having cosy relationships with banks and ignoring the problem signs, towards a well structured system with the ECB taking the lead and allocating responsibilities to national supervisors.
While Germany would prefer to retain control over their smaller and regional banks, some of which they had to bail out, and hand responsibility only for the largest 25 or so systemic banks to the ECB, Internal Market Commissioner Michel Barnier was clear that all credit institutions should be included.
Speaking in Strasbourg after the plans had been outlined to the European Parliament, he said, “Which banks will be affected? To be credible, all banks, because this is essential to be credible and this is one of the main lessons of the crisis — we saw that small and medium banks can create major problems.”
Ireland and other countries are anxious that the supervisory mechanism is in place by the target date of Jan 1 next year as it is a precondition for the EU’s new rescue fund, the ESM, to be able to directly fund banks.
However, German Finance Minister Wolfgang Schaeuble urged caution. “We shouldn’t raise expectations we can’t meet in the end,” he said in a statement on the timetable for introducing the new system.
Germany’s ruling Christian Democrat party said it should concentrate on systemically relevant banks in a pilot phase, while its sister party, the more right-wing CDU, said it would mount a challenge against the plan including the savings and co-operative banks.
But the country’s private banking group that includes Deutsche Bank, and Commerzbank that received state bailouts, welcomed the plan to include all banks saying the crisis was sparked by smaller banks.
The ECB would have a separate board chaired by a member of the Bank’s board, and it would have the power to supervise, identify problems in advance and insist on action, sanction and fine up to 10% of a firm’s total annual turnover, or up to twice the gains from breaching the rules, for non-compliance. It could also shut down banks — a regular feature of US banking but almost unknown in the EU. They couldalso carry out raids on banks, grant as well as withdraw banking licences, oblige them to carry out stress tests and to increase the capital they hold.
National supervisors would retain some powers for non-euro cross border banks and consumer protection. They would also implement ECB decisions and carry out oversight of banks.
Under the draft proposals, the ECB would be expected to answer questions from the European Parliament on its supervisory decisions. It also would present an annual report to members of the assembly and finance ministers.
London is worried about the move in case it would jeopardise its position as the financial capital of the EU. Others countries not yet in the eurozone, such as Hungary, are also concerned:
“We will focus on the question of a fair balance of rights and obligations as well as on how to keep under control potential impacts (direct and indirect) on the banking sector and financial stability of non-euro member states in the beginning and later on in the process of establishing a fully fledged banking union.”