What many observers seemed to fail to detect is that the euro area summit decided to carry on smoothly along its established road. Markets appeared to shrug this off – also completely missing the agreement to accelerate the journey and make the destination more ambitious. The summit statement said: “We affirm our strong commitment to do what is necessary to ensure the financial stability of the euro area… to break the vicious circle between banks and sovereigns, the [European] Commission will present proposals for a single supervisory mechanism soon… When an effective single supervisory mechanism is established… the ESM could have the possibility to recapitalise banks [in the euro area] directly.” Put plainly, direct bank recapitalisation necessarily follows once the “banking union” is up and running, but this may be only a part of “what is necessary”.
[Commissioner Barnier] knew how the banking union would be built, by ”stepping up the democratic support and control of the EU. We need an integrated financial union with enhanced democratic control.” At first blush, this sounds quite uncontroversial. However, fleshed out, it looks rather more open to debate. Andrea Enria, chairman of the European Banking Authority, put it a little more clearly by arguing that, for banks, “you need to obviously bring the controls to a European level”.
I have argued that the solution should include creating the legal category of a “European Bank”. Qualifying banks would be only those capable of spreading cross-border contagion within the euro area. Their prudential supervision would be undertaken by the ECB. At the same time, the ECB would be able to request the ESM to adopt the power to backstop a pre-funded deposit guarantee scheme and resolution fund for these banks until they had built their own. They would be subject to regulation limiting “large exposures” to national public debt, opening the way to holding liquid “European debt” such as the Treasury Bill Fund.
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