09 July 2012

Bank oversight plans may threaten ECB independence - Draghi urges pragmatic approach

At the last European Union summit, leaders agreed to establish a banking oversight authority. It remains unclear, however, what such a system might look like. The European Central Bank is to play a role, but can it maintain its independence?

Mario Draghi, aware of the potential for embarrassment, warned last week that the latest major project in the eurozone could not be allowed to pose any "threat to the reputation" of his European Central Bank (ECB).

The concern is justified. In the future, Draghi's staff will not just be expected to shape monetary policy, but also to supervise banks in the eurozone, according to the decision reached at the last European Union summit. A new, cross-border "supervisory mechanism" is to be created, if possible by early 2013 according to a summit paper. This was the condition under which the German government agreed to allow the permanent bailout fund, the European Stability Mechanism (ESM), to inject capital directly into ailing banks.

There is also debate over which banks are to be supervised in the first place. The ECB directorate wants to start with the 25 most relevant banks. Christian Noyer, head of the French central bank, believes this to be ineffective and openly advocates the supervision of all lenders. That would be 6,144 of them.

Draghi has repeatedly stressed that the ECB will only be "consulted" in the process. In reality, however, his governors have already taken the initiative. During an ECB Executive Board meeting last Thursday, the central bankers didn't just approve a record low prime rate of 0.75 per cent. In addition, they decided quickly to assemble their own proposal for the regulation of banks, which they intend to submit to the European Commission by September.

"We have to be very pragmatic", given the narrow time frame, says Draghi. Other sensitive issues also have to be clarified in a short amount of time. For instance, how can the monetary policy experts in the ECB remain independent if the regulators at the bank are accountable to politicians because they ultimately would be making decisions on the use of taxpayer funds? And what happens to national agencies like Germany's Federal Financial Supervisory Authority (BaFin), which currently operates outside Draghi's jurisdiction?

Full article

© Spiegel Online