Risk Annual Summit: Banking union set for mid-2014, says ECB

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Europe's banking union will take effect by the middle of 2014, Ignazio Angeloni, director-general of the European Central Bank's financial stability directorate told delegates this morning at the Risk Annual Summit in London.

The timetable for the new single supervisory mechanism (SSM) – in which the European Central Bank (ECB) will take on some oversight responsibilities for large, cross-border banking groups – became a little clearer yesterday after negotiators from the European Parliament, the Council of the European Union and national governments agreed the legal text for the union. A one-year period of preparation will now follow, Angeloni said, which means the SSM should be up and running by mid-2014.

Angeloni argued the move would help break the "dangerous embrace" between banks and their states, and said national supervisors had made "gigantic mistakes" in the run-up to the crisis. "The SSM is clearly a cornerstone of the banking reform process in Europe," he told the conference.

Under the plan, the ECB will take responsibility for supervision of the euro area's systemically important financial institutions – the largest, most interconnected banks, with assets of more than €30 billion or which constitute at least 20% of their home country's GDP, as well as any that have received EU funding. Angeloni said around 130 to 150 banks, accounting for around 80% of banking assets in Europe, fall into this bucket. The ECB's supervisory powers will be comprehensive, from authorising banking groups' right to operate, to validating their models.

Day-to-day oversight of the remaining 6,000-odd credit institutions would remain with national authorities, although the ECB would have overall responsibility. Accordingly, the ECB can decide to take over direct supervision when it deems it necessary and can instruct national supervisors in certain cases, while national supervisors must report important decisions to the ECB in Frankfurt. The plan includes the opportunity for non-euro area jurisdictions to join the SSM. The UK has consistently said it will not participate in Europe's drive towards a banking union.

The primary argument for ECB oversight has been the ties between bank and state that grew during the crisis, as the perceived risk of further state-backed bailouts meant investors came to see national banking industries as a drag on sovereign credit, and deteriorating sovereign credit fed back into the banking industry via banks' holdings of domestic government debt.

"The correlation between sovereign spreads and bank spreads has increased sharply in Europe's peripheral countries. And this is a phenomenon that is specific to Europe. If you look at the US, for example, the correlation is much less significant," Angeloni said. He argued banking union would help tackle these issues – and he also addressed suggestions that different national interests would limit the practical impact of the SSM.

"Europe is a federation of sorts. It is composed still of very strong, powerful national authorities – in all dimensions, political and financial. This is the history of federations, and we have to live with this system," he said.

"There will be periods of crisis. There will be mistakes, because every supervisor makes mistakes. Don't think that the supervisor can be infallible. The European supervisor will make mistakes just as national supervisors have made gigantic mistakes," Angeloni said.

The European supervisor will make mistakes just as national supervisors have made gigantic mistakes

The next logical complement to the ECB as supervisor is a European resolution authority with the power to trigger bank bondholder bail-ins, he said, and indicated the European Commission would publish a proposal by the end of 2013.

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