The crisis in Spain has once again highlighted that the ailing banks of a country cannot only shake the country's finances but also affect other country's financial institutions. This is what pushed the EU at its last summit in June to call on the European Central Bank to be that supervisor. Many see this, however, as a conflict of interest. What is the ECB to do when it believes taxes have to be raised, but is concerned about banks getting into trouble. Can the ECB shut down banks while, at the same time, it is printing money and flooding the market with cash?
Monetary policy and banking supervision should not be thrown together, argues Martin Faust, professor at the Frankfurt School of Finance. After all, there is already banking supervision at the European level, known as the European Banking Authority (EBA). "This institution has so far only very little sway because national politicians have been reluctant to surrender power."
This has changed, however, as a result of the crisis. Partly because it is understaffed, the EBA has drawn a lot of criticism, says Faust. There still is another aspect that speaks against a supervision by the ECB. "A European banking supervision only makes sense when actually all the countries take part", he told DW. But, as the ECB is only in charge of the eurozone, such supervision would exclude Britain – the most important financial hub in Europe.
It seems there is no way past ECB supervision. Sascha Mölls, economics professor at Marburg University, does not see this as a fundamental problem. What he is concerned about is common supervision that would not take into account national differences. "In Germany we have a lot of small banks", he says. They provide the local economy with money, doing the traditional job of a bank. "Those banks normally will not need supervision along the lines of the American model", Mölls told DW.
But that is exactly what the EU Commission is planning. In September, the Commission plans to present a concept which would subject all 8,400 eurozone banks to the same supervision rules. This, however, would overstrain the supervision authority, says Faust. "I think it makes sense to first concentrate on the systemically significant banks - in other words: the large ones", he told DW
Berlin would also prefer to have only the 25 largest banks being supervised by the ECB. "For savings banks and mutual savings and loan institutions there is no need for additional supervision", Justice Minister Sabine Leutheusser-Schnarrenberger told the German Handelsblatt business daily.
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