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EU Banking Union: even the timing, 9/11, Spells Disaster

Interest-Rates / Euro-Zone Aug 15, 2012 - 09:19 AM GMT

By: ECB_Watch


Best Financial Markets Analysis ArticleEven the timing of the Banking Union spells disaster. Proposal to be announced 9/11, says WSJ (Source). Discussed in this post, the ECB taking responsibility for banking supervision.

Cast: Sharon Bowles (EU Parl), Mario Draghi (ECB), Nicolas Véron (Bruegel)

The victim: checks and balances

It looks like it's already in the bag, the ECB will have responsibility for banking supervision. What this really is, is a re-appropriation and extension of the prudential regulation role it held prior to the creation of the EBA (answerable to the EU Commission).  That's because NCBs, as members of ESCB, were already under ECB since its inception.

The ECB empire is regaining the ground lost to the EBA, and more; EBA vestige of a stillborn institution.

Is that good? The ECB is only accountable to EU citizens through 'monetary dialogues' with the EU Parliament's ECON Committee. That's weak by statute and this blog has shown evidence EU Parl has lacked diligence in accomplishing its mission under the Chairmanship of Sharon Bowles. Refer to 'Also see'. After having turned a blind eye to irregularities in Draghi's nomination, her absence of circumspection about expansion of power of the ECB is part of the normal (but wrong) course of events (Source):
I think that one of the things it recognises is that banking supervision has to take account of what monetary policy is, so to have the ECB involved in supervision of eurozone banks and therefore taking account of eurozone monetary policy in that supervision is a good idea.

The track record of the departed president of the ECB, as Krugman puts it, was an 'impeccable disaster' (NYT). The current president, Mario Draghi, is compromised—amongst others—in the GR-Goldman affair. If you're reading this blog for the first time, it's not guilt by association with the bank—'his past at Goldman'—that is implied in occasional references to matter in the press. The ECB has repeatedly obstructed, under both Trichet and Draghi, demands by Bloomberg to release its GR-Goldman swaps file (ZH), and there's a lot more that took place in Parliamentary proceedings. Refer to 'Also see'.

The US experience teaches us that if not for CFTC separate from the Fed, there would be no record of dissension among regulators on financial derivatives—Brooksley Born vs Greenspan in the 1990's. In a merged entity, the bad guys could have simply found cover behind 'the consensus at the time' to explain the financial crisis, and gotten away with it.  One reason they won is also the reason they became complacent: concentration of power. That's three reasons to hand over the reign of supervision to the EBA rather than the ECB.
Bruegel reassures Congress about EU plans—worrying

What is the reality about Bruegel underneath the pompous and self serving description they present themselves to the US Congress (Source):

Bruegel is a nonpartisan policy research institution based in Brussels that aims to contribute to the quality of economic policymaking in Europe through open, fact‐based and policy‐relevant research, analysis and discussion.—Nicolas Véron ? We've begun addressing this question previously ('Also see') and let's find out more as we go along, here, and perhaps in subsequent posts. Here's an opinion by the same author as related in a recent article (WSJ):


The ECB can also take advantage of an existing legal authority which gives it some responsibility for bank regulation, so no treaty changes are necessary. And unlike the EBA, whose reputation took a beating over the way it conducted stress tests for European banks last year, the ECB currently basks in the glow of political favor in Berlin and other capitals.

If Paris is worth a mass, the emergence of an empire—so much more fascinating than democrary, is worth a jab at an institution that barely spread its wings. The EBA relied on NCBs to conduct the stress tests. The odds are ECB wouldn't have done a better job. In fact, the methodology was established in 2010 jointly by ECB and CEBS, of which EBA is an offshoot (ECB). EBA probably bowed to the pressure not to include sovereign default scenarios. Not a fatality. The ECB, OTOH, has one more pressure to contend with: its own balance sheet.
I read Véron's statement to the US Congress.  There are valid points but too many half truths to consider his analysis impartial. For example, he feels the EBA's board reflects national interests, not an EU interest. But so is the ECB's board: the South/North divide, for one, has been a constant source of infighting. Regarless, it misses the point. The dominance of big banking and finance is prevalent across national authorities—even continents, and there is no basis for thinking the ECB is independent from that power. On the contrary. The much publicized watchdog complaint taken into account by the EU ombudsman is but a facet of a larger, deep seated, problem.

In a separate piece, Véron addresses the problem of TBTF, concluding as follows (VoxEU):

The discussion on possible remedies to the too-big-to-fail problem is not a simple one, and no silver bullet is at hand.
How about break it: would that reflect poorly on the sophistication expected from a 'senior fellow'? Technocratic deadlock.


By Jareth

ECB Watch

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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