European finance ministers agreed early Thursday morning to empower the European Central Bank to supervise the bloc’s largest banks, a deal that is expected to be ratified by European leaders on Friday. Britain, the Czech Republic and Sweden opted out of the arrangement.
Under the agreement, the ECB will monitor banks with assets that are worth more than €30 billion or the equivalent of 20 percent of their state’s gross domestic product, excluding small and regional banks that aren’t heavily exposed to sovereign debt. Some two hundred out of the roughly 6,000banks in the eurozone would fall under the new regime.
Plans for a banking union were floated this summer in response to the continent’s spiraling debt crisis. Joonatan Jakobs explained for the Atlantic Sentinel at the time why the high degree of interconnectiveness between the banks and the states in which they reside necessitated intraregional oversight.
A national bank tends to unofficially support its sovereign by buying government debt. An ailing financial system can by itself generate a large negative shock to the economy due to its function in allocating resources. This is especially true in Europe as it depends greatly on its banks for this function. Large, systematically important banks tend to be implicitly backed by their sovereigns. When either experiences considerable stress, the other suffers similarly.
Jakobs observed that a banking union would be another step toward “ever-closer union” and is therefor regarded warily by Euroskeptics in especially in the Northern European member states that have had to bear the brunt of bailing out their weaker counterparts in the periphery of the currency union.
The banking union decouples the banks’ and sovereign balance sheets as it will give a central authority the ability to directly support financial institutions without national government approval. The German finance minister Wolfgang Schäuble cautioned on Thursday though that this won’t be in effect until 2014.
Three countries outside the eurozone — the Czech Republic, Sweden and the United Kingdom — refused to submit the centralized financial oversight and secured safeguards to ensure that they cannot be easily outvoted in the European Banking Authority which was established last year. In the future, EBA regulations will require the approval of a majority of countries in the single supervisor and a majority of those outside it as well as a general qualified majority of European Union member states. Chancellor George Osborne said that Britain had secured a “very good deal.” His Swedish counterpart Anders Erik Borg was less optimistic.
Asked about the banking union on Wednesday, Borg said it marked a “sad day for Europe” before lamenting what he described as “a move toward euro banks, euro taxes, euro transfers.”
We think those are steps in the wrong direction. It might be very popular among the eurocrats but I think there are very few Europeans actually wanting these developments.