03 February 2013

WSJ: EU aims to free flow of funds across borders

The EU has asked national bank regulators in the 27-nation bloc to explain policies that may be preventing free flows of funds across national borders, the first public step in a campaign by EU authorities to combat fragmentation of the region's financial markets.

The free movement of money is a central pillar of the EU's single market, but some actions by national authorities since the onset of the financial crisis in 2008, intended to protect local banking systems, have prevented banks from moving funds to other countries.

A letter sent on Friday from the European Commission, the EU's executive arm, to national banking authorities asks them to describe and explain such policies. The commission's attention is focused on restrictions that some national regulators have placed on banking groups that have operations in multiple EU countries.

Such policies include preventing national operations within a banking group from transferring capital to one another, prohibiting banking subsidiaries from giving profits to their parent companies and limiting intra-group lending.

The Commission was considering legal action to address the problem, starting a process that could end up at the European Court of Justice. But an EU official said the Commission isn't ready to take that step. Instead, it wants to resolve the issue at the European Banking Authority, the London-based coordinating body for national bank regulators. Only if that doesn't work would the Commission take more-drastic action, the official said.

A few incidents and policies have been particularly worrisome for the EU. One is pressure that the UK has wielded over foreign-owned banks to convert their branch operations, which are overseen by regulators in the country where the foreign-owned bank is headquartered, into banking subsidiaries, which would be supervised in the UK.

Subsidiaries are required to hold their own capital and reserves of liquid assets, giving them independent means to respond to financial stress even if their parent company lacks the power to save them.

Investors have rushed back into markets for sovereign debt from fiscally stressed eurozone countries in recent months, driving down yields on Italian, Spanish, Portuguese, Irish and even Greek bonds. But national restrictions on transfers of money by banks could still be preventing lower government borrowing costs from flowing through into the real economy and providing an economic jolt to the eurozone. Cross-border banking restrictions may have also exacerbated the more acute cases of European financial trauma, such as last summer, when bond yields soared and investors feared a break-up of the eurozone.

The creation of a new eurozone banking supervisor housed at the European Central Bank should limit conflicts among national regulators within the currency bloc. But it will still be necessary to coordinate supervision of banks in countries, such as the UK that won't be covered by the eurozone regulator, the Commission says.

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