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What will determine the scale of any capital raising are the details of the stress tests, which may not be known for several months. One reason for the lack of detail is that the ECB has yet to appoint its new supervisory board, which will lead the assessment. But the lack of detail also reflects the political pressure the ECB is under from national governments pushing hard for a minimalist approach, emboldened by evidence of growing investor interest in buying distressed assets from crisis-country banks.
The odds are stacked against [Draghi]. All decisions of the supervisory board—which some estimate could number 10,000 a year—must be ratified by the ECB’s Governing Council, providing plenty of scope to push national agendas as each eurozone member has a seat on the council for its central bank chief. The ECB will also remain constrained by national laws and its continued reliance on national authorities as it builds up its own supervisory staff to a planned 1,000 from 100 today.
Nor can Mr Draghi count on political support for a maximalist approach. German Chancellor Angela Merkel has effectively reneged on her June 2012 commitment to allow the European Stability Mechanism to invest directly in banks, fearing it would be used as a first rather than last resort. Similarly, Germany has been wary of creating a robust single resolution mechanism, perhaps fearing it could be used to close down German banks.
Meanwhile any attempt to put the Banking Union on a more robust legal footing would require changes to eurozone treaties, triggering UK demands for a wider renegotiation of the workings of the European Union that could paralyse EU policy-making for years.
The ECB risks ending up with the worst of all worlds: responsibility but not power, obliged to preside over a banking system seemingly unable to escape its flawed past. As with the euro’s creation, the solution may have to wait for the next crisis.
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