‘ECB control of banking could hurt Irish system’

The decision to hand responsibility to the ECB for the supervision of the eurozone’s 6,000 banks could have damaging implications for the Irish banking system, according to University of Limerick economics lecturer Stephen Kinsella.

He said the move could increase the costs of regulation and could lead to dangerous oversights across the region.

European leaders agreed to move towards a banking union at the Jun 29 EU summit in an effort to resolve the debt crisis sweeping the region. A key part of the negotiations since the summit is which body would assume responsibility for the banking system. The German government, in particular, insisted that responsibility for the supervision of the banks would have to be located in one centralised agency before agreeing to any of the other proposals that came out of the Jun 29 summit. The most important of these is that funds from the European Stability Mechanism (ESM) would be used in future to recapitalise struggling banks, which is aimed at breaking the ‘deadly embrace’ between the banking system and sovereign.

It now looks certain the ECB will be given the mandate of supervising banks.

Mr Kinsella argues that there are a number of drawbacks with this move.

“The Irish banks will no longer have a personal relationship with the regulator and this is an extremely important issue.”

The regulatory regime was accused of being too light touch during the boom years, with disastrous consequences. But one of the reasons why Ireland has been successful in attracting foreign investment in the area of financial services was that the Irish regulatory regime was seen as nimble and proactive and there was an open channel of communication between banks and the regulator.

“Another crucially important issue is that there could be less effective regulation on the ground, because the ECB will have to supervise 6,000 banks across the region, and that could lead to a lot of oversight,” said Mr Kinsella.

This could result in a huge amount of mis-priced and under-priced risks in the banking system, which will flare up in future banking crises, he added.

It could also lead to a more costly banking environment, because, if the ECB increases the layers of regulation, it will increase the costs of compliance.

Moreover, the eurozone comprises many different types of banks with different regulatory needs. Using one supervisor is a “very blunt instrument,” said Mr Kinsella.

“Overall, a banking union is essential, but I would question whether it is advisable to give the responsibility for supervision to the ECB, which is already responsible for saving the euro and looking at inflation.”