Friday, December 14, 2012


In the night of 21 on 13 December, after fourteen hours of meeting of the European Council of the Ministers of Finance of the 27 European Union members, a compromise was reached on a European banking supervisor. Such a supervisor is needed because since 2008 many banks have been rescued by their governments. One of the main lessons of the credit crisis is that dozens of banks are to big to fail. The financial obligations of these banks are so significant that a bankruptcy threatens the entire financial system. If such a 'banking system' threatens to capsize, the government always must help. In recent years a number of governments (Spain and Ireland) have pumped so much money in their banks that they themselves have entered in payment problems. The European debt crisis was born.That is why the European governments now want to create a system for an orderly and timely remediation of unhealthy banks. This should prevent governments te be faced again with emergency situations in which they have no other choice than to put money into a bank. As a first step in June the European Government leaders decided that the European Central Bank (ECB) will be the European banking supervisor.

The principle agreement is that in the European Banking Union, the 200 European Banks with more than € 30 billion on their balance sheets (the so called 'systemic banks' that are to big to fail) and the banks receiving financial support from the state will be supervised by the European Central Bank ECB (Frankfurt, Germany). De non-euro countries Great Britain with London as a financial world centre, Sweden and the Czech Republic decided not to participate. All other non-euro countries are expected to participate in the EBC supervising system. All the involved banks together will guarantee each others savings and there will be a common procedure in case a bank is going to fall. The ultimate goal is that the taxpayers don't pay anymore for the rescue of a bank.

The € 30 billion limit is the result of a compromise between Germany and France. The latter wanted together with the European Parliament and the European Commission that all 6000 European banks would be controlled by the ECB. However, Germany did not want to put at risk the financial reserves of the about 1600 local and regional Landes- and Volksbanken. These smaller banks with their many financial reserves are influenced by local and regional authorities. It would be difficult for Federal Chancellor Agela Merkel to confront on gthis matter these local and regional politicians before elections in september 2013.

The main supervisor is thus the European Central Bank. This requires, however, the Convention for the ECB to be adjusted to make sure separation between the 'prudential supervision' on the health of the banks, and the "monetary control 'on the financial stability of the eurozone economy. The ECB in Frankfurt should hire a lot of new employees in order to perform the monitoring.

Another important measure is that at the moment the ECB indicates that the supervising system is working the so called European emergency fund EMS (European Stability Mechanism) can be authorised to give loans to banks without influencing the public debt of the country.

German Chancellor Angela Merkel called the agreement invaluable. "We will have a clear separation between the responsibilities for monetary policy and banking supervision." However, some critics are concerned that the political independence of the monitoring of the banks is not sufficiently guaranteed. They point to the need for proper procedures for this to ensure. The Cypriot Minister of Finance Vassos Shiarly Shiarly spoke of the agreement as a Christmas present for all of Europe. "According to him, the overall objective of the Bank agrees to restore confidence in the sector, he added.

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