European Parliament Got Huge Powers with the Supervisory Mechanism17/09/2013 19:22
Source: EU Inside
It took precisely a year to make the biggest integrational step since the introduction of the euro - the single supervisory mechanism (SSM) for banks to be approved after a vote in the European Parliament during its September plenary session, thanks to the historical inter-institutional agreement. With that document, the MEPs get huge powers thus becoming a key factor in European politics. The supervisory mechanism is the first big step toward the creation of a banking union, the idea for which was approved by the leaders of the member states in June 2012 with the main aim to put an end to the vicious circle saving banks with taxpayers' money, crisis and again saving banks with public funds.
What does the mechanism do?
The SSM will cover all eurozone banks as well as those outside depending on whether non-euro countries will join it or whether a euro area bank is connected with banks outside the zone of the single currency. The supervisory role will be performed by the European Central Bank for which special rules are established to make clear distinction between its supervisory functions and its monetary policy. According to the bank's calculations, the financial institutions in the euro area are around six thousand, but not all of them will be directly supervised by Frankfurt. ECB will have a direct responsibility for the banks that own assets of more than 30 billion euros or who have at least a 20% share in the GDP of their home country. Under the direct supervision of the bank will also be all those institutions that requested or received public financial assistance through the eurozone bailout mechanisms like the European Facility for Financial Stability (EFSF) and the European Stability Mechanism (ESM).
SSM is a huge breakthrough after the several failed attempts of the European leaders and institutions via small steps and without giving up more sovereignty to solve problems revealing deep interconnectedness. As Joerg Asmussen, member of the ECB executive council (Germany), acknowledged at the Eurogroup informal meeting in Vilnius on September 13th, the two previous stress tests that had to verify the real condition of the European banks, failed. "Now we probably have a third, last, chance to restore our banking system", he said.
The negotiations on the SSM, although short for the European dimensions, were accompanied by intensive controversy - first, between the member states, a large part of which did not want to give away practically more sovereignty to an external (but as a matter of fact entirely domestic - ECB) - body and tried to agree concessions that would allow them to protect their national interests. And second - between the institutions (the Council and European Parliament and later between the Europarliament and ECB). It can be said that the speed and efficiency of these negotiations is the result of the bad economic situation of the euro area, the growing unemployment and the lack of even short-term positive outlook. Another vicious circle was created - there is potential for growth, but there is no accessible funding. Credit is tight in many of the members of the monetary union and expensive. As a result, enterprises do not open additional activities, they do not make new investments and therefore they do not hire new workers. Michel Barnier, the EU internal market commissioner, explained this vicious circle with simple numbers - 65% of the economy in Europe is financed by banks, unlike the US where this share is much lower.
The powers of the European supervisor will include authorising and withdrawing authorisation of all credit institutions in the euro area. ECB will be also responsible for acquisitions and disposal of holdings of the banks. It will hold stress tests which, however, will not replace the tests being performed by the European Banking Authority, created in 2010 in a package with some other bodies - the first hesitant attempt for europeanisation of the solutions for problems that have long been common European issues. National supervisors will continue to perform their functions, but they will be reduced only to the less significant banks. ECB, though, will have the right to demand the entire necessary information in investigating a case, to hold investigations of credit institutions as well as of people involved in certain activities, and to hold inspections on the spot. ECB will be able to impose financial sanctions.
ECB's supervisory part will consist of a chair and a vice chair, elected by the ECB governing council and consisting of four representatives of the central banks and one representative for every national bank of a competent institution. Separately, a panel will be established of mediators to resolve disagreements that could arise between national competent authorities and the bank's governing council.