September 11, 2008 / 11:08 AM / 11 years ago

EU states still dodging bank supervision bullet

NICE, France (Reuters) - EU states will dodge the thorny question of who bails out a cross-border bank when they meet to streamline supervision this week and a bigger role for the European Central Bank seems unlikely.

Banking supervision is still done largely on a national basis and if a major bank with a multinational presence fails there is currently no mechanism for dealing with it at the EU level.

Critics of the status quo say this makes it more likely that a major institution in trouble would at worst not be rescued and at best be subject to messy delays, with all the resulting fallout on the banking system and depositors.

Cross-border banks and insurers have been pressing European governments for years to make it simpler and cheaper for them to report routine compliance data to fewer market watchdogs.

Central bankers in charge of keeping financial markets stable also want closer cross-border cooperation among supervisors so that problems can be spotted earlier.

But the creation of a pan-European banking regulator faces complex political hurdles and vested interests.

The EU’s 27 finance ministers meet in Nice, France on Friday and Saturday and are due to back a simpler system for the 50 or 60 multinational banks to report to regulators from 2012.

Ministers will also flesh out the role of new colleges of supervisors intended for each multinational bank and insurers seen as “systemically” important.

The moves are part of reform to the EU’s banking capital requirements and insurer solvency capital rules that will be adopted in coming months and which will hardwire colleges of supervisors into EU law for the first time.

All progress for the banks but not enough bearing in mind Europe’s lucky escape during the credit crunch, critics say.

European banking rescues in the past year at Northern Rock in Britain and IKB in Germany were domestic affairs of manageable size for national treasuries — no cross-border burden-sharing or lender of last resort issues were raised.

Some say it may take a bigger crisis - on the scale of the Fannie Mae and Freddie Mac crisis in the U.S. - to prompt the step change needed to oversee an increasingly integrated financial market dominated by multinational players.

“If what happened during the credit crunch is not sufficient, what does have to happen to make governments reconsider?” said Karel Lannoo, chief executive of the Centre for European Policy Studies.

“What is a college of supervisors - it’s an enhanced spaghetti model. Nobody has an overall view,” Lannoo said.

Pan-EU committees of banking, insurance and securities markets regulators form the core of stronger cross-border regulatory cooperation but national sovereignty remains a powerful hurdle.

EU Internal Market Commissioner, Charlie McCreevy, said the decisions of these committees should remain legally non-binding, as requested by most member states.


Economists Franklin Allen of the University of Pennsylvania and Elena Carletti of the University of Frankfurt said in a paper to central bankers that some European banks are now so big relative to their home countries that they are too big to save.

They cite Belgian-Dutch financial group Fortis FOR.BRFOR.AS which they calculate has assets greater in size than the gross domestic product of Belgium.

If such a key bank were to fail “the key issue would be how the burden would be shared between countries of the EU”, Allen and Carletti said.

And tinkering with the existing system won’t be enough to deal with a failure at a cross-border bank, lawmakers and experts say.

“Member states have not given enough thought to burden sharing,” said Robert Priester, who tracks wholesale markets regulation at the European Banking Federation.

The European Central Bank is now being touted as a solution to the lack of a “helicopter” view on what’s happening in Europe.

It won plaudits in August 2007 as the world’s first central bank to pump liquidity into money markets as the U.S. home loans crisis began snowballing into a credit crunch.

“At some point someone has to take the lead and shake things up a bit,” Pervenche Beres, chairman of the European Parliament’s influential economic affairs committee told ECB President, Jean-Claude Trichet, this week.

The message seems to be hitting home, too.

In the past Trichet stressed the need to improve existing structures but this week edged further in reply to Beres.

“We would certainly have a look at it very, very carefully in the Governing Council. I can’t say we have a position on it in the Governing Council but I observe what has been proposed with great care,” Trichet said.

Still, many EU countries would be leery about handing over national supervision powers to a fiercely independent ECB as this would limit their ability to help a bank in distress and limit political fallout.

The burden-sharing and lender of last resort issues would almost certainly remain unresolved even with the ECB enjoying a hands on role in supervising commercial banks.

Trichet said the ECB’s role is to help out at times of market liquidity problems and cautioned about a lender of last resort role.

“If taxpayers’ money is at stake... then of course moral hazard seen from the taxpayers’ standpoint is of extreme importance. In this domain we certainly have to be very careful,” Trichet said.

Reporting by Huw Jones, Editing by Chris Wickham

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