Brussels, 09/01/2013 (Agence Europe) - The German council of economic experts that advises the government of German Chancellor Angela Merkel on financial and economic issues recommends a three-stage banking union by 2020 in an annual report published ahead of political agreement at the ECOFIN Council on setting up a single bank supervision system. The German document was published in English at the end of last year (see EUROPE 10751).
The German experts' strategy for setting up a Banking Union is based on a two-pronged approach: - financial responsibility and surveillance should be kept at the same level, firstly national and then European; - legacy assets must not come under joint responsibility. On the second point, the European Council asked the eurozone to decide on an operational framework, including details of how to deal with legacy assets, to ensure that the European Stability Mechanism (ESM) can directly bail out struggling banks once the eurozone bank supervision mechanism has been set up (see EUROPE 10752).
In the initial phase, which would last for 12 months, European legislation would be adopted and the necessary bodies set up, such as a European restructuring authority. The German experts say that the EU treaties would have to be amended to give the banking union a solid legal basis. In this first stage, financial institutions could start informing national and European supervisory bodies about their financial state of health, but responsibility for the banks would remain at the nation level. The experts say the ECB should consider tightening refinancing conditions to connect them more closely with bank solvency.
Credit institutions and national supervisory bodies would use the second, qualifying, phase to apply to join banking union. Independent experts would examine the assets held by banks, which would have to meet the Basel III liquidity and solvency rules and a leverage ratio (of at least 5%, suggest the German experts). The 6,000 or so banks in the eurozone would be divided into three groups depending on size at a specific point in time (larger, medium-size and small banks).
During the qualifying phase, banks that have not yet been approved should be even more closely monitored not only by national supervisory bodies, but also at EU level, particularly large, cross-border banks. Stress tests could be used to determine extra capital requirements. Some banks could be restructured or wound up as part of this process, and this would be compulsory for banks whose application is rejected. If necessary, the country where the bank is registered could appeal to the ESM, but would remain liable for paying back any aid paid to the bank in question from Europe, as is the case for the current bailout of Spanish banks.
If the first two phases are not delayed, then the third phase, transition to a banking union proper, would start in 2019. The eurozone bank supervisory system would control all authorised banks, with some powers being delegated to national supervisory bodies. Wholly independent of the ECB, the European bank restructuring body would be responsible for restructuring struggling banks, possibly with aid from the ESM. At this stage, Europe would supervise and be financially liable for all banks remaining on the market in order to keep liability and control at the same level. (MB/transl.fl)