Barring a major accident, the euro zone will soon have a new banking regulator. And Mario Draghi will crown a happy summer. The president of the European Central Bank has already shored up the euro and outflanked the Bundesbank’s opposition to his new bond-buying policy. He may soon get the last tool he needs to do “whatever it takes”, as he said, to keep the euro zone together.
Some details are still fuzzy, but the direction of the probable compromise is clear. True to form, the European Commission, tasked with submitting a proposal to governments on the matter, is angling for a strong pan-euro zone body with extensive powers. That’s the starting point of the discussion, not the end of it.
The question of whether the new regulator should - or even could - oversee all of the monetary union’s 6,000-odd banks has been raised. Brussels thinks it must. In reality, the future body — which will in effect be controlled by the ECB — almost certainly have direct oversight only over the largest banks, with smaller lenders left under the watch of national supervisors.
That said, the euro zone regulator would have the option of dealing with a non-systemic lender in case of crisis. This is a moot point in most countries, where bank regulators are already either within, or closely linked to, the national central bank. But it is a serious issue in Germany, where financial watchdog Bafin is distinct and separate from the Bundesbank.
That leaves the question of how to distinguish the ECB’s monetary role from its supervisory responsibilities. There’s an inherent conflict of interest between the lender of last resort and the regulator. The bank regulator also needs to be submitted to parliamentary and judicial controls, whereas the central bank must remain independent in its operation of monetary policy. So the new institution shouldn’t look like the ECB. It should have different governing bodies, a distinct legal standing and a different name - even though it will be heavily influenced by the central bank’s thinking and probably be chaired by its president or vice-president.
Euro zone governments will move to their traditional bargaining mode once the Commission formally unveils its proposal in mid-September. But from the go everyone wants the future regulator to have teeth.
Equipped with the ECB’s incisive authority, it will likely get a full set.
