Wednesday, November 5, 2014

European Central Bank to supervise most larger banks in Euro area

The European Central Bank(ECB) has now assumed responsibility for most larger banks in the euro area. The banks under supervision represent 82 per cent by assets of the euro bank sector.

The supervising group the Single Supervisory Mechanism(SSM) operating out of Frankfurt, Germany is expected to improve and strengthen the financial stability of the euro area banking system and increase the the safety of the credit institutions within the area. The chair of the the supervisory board of the ECB, Daniele Nouy said that more than 900 banking experts had been hired for the new SSM unit and claimed: "We now have a unique opportunity to develop a culture of supervision that is truly European, building on the best practices of supervisors from across the euro area."
Sven Giegold, Green Parfty economic and finance spokesperson for the European Parliament said that the SSM represented a "a milestone for more financial stability in Europe." He claimed the new supervision would prevent the lax national supervision of banks in some countries that had contributed to the financial crisis faced by some countries in Europe. An audit of 130 EU banks in October of this year showed that only 25 institutions failed the stress used. While some banks in Italy, Greece, and Cyprus had poor results, the ECB felt that the banks could take action to rectify their situations. The banking supervision group has its own website here with much more information.
  The SSM took over supervision today after a year of preparation that included the stress test mentioned earlier. As of now, 120 larger banking groups will be under supervision. However, the other approximately 3,500 banks will set standards and monitor the standard of national supervision and work closely with national authorities.
 The ECB supervision of banks is a compromise solution to the EU financial crisis. President Hollande of France had wanted to issue Eurobonds as a solution to the crisis. German chancellor Angela Merkel opposed the bond solution. At the 2012 Euro summit a banking union was created that would involve banking supervision, deposit insurance, and European level settlements. Many German economists regarded this development as very much like the eurobond solution but under another name: They saw the proof of this in the decision at the summit to allow the European Stability Mechanism rescue fund to help banks directly, as soon as pan-European banking supervision could be set up with the involvement of the European Central Bank. In other words, European taxpayers would have to pay the debts of ailing banks.
In September 2012 the president of the European Commission supported by France suggested a plan for the banking union. The ECB would take over supervision of all 6,000 banks in the euro zone beginning of July of 2013. Germany vetoed that plan. Some German economists think that the ECB is not the riight body to supervise the banks. Thomas Hartmann-Wendels, professor of banking at the University of Cologne claims:. "The ECB has no mandate to do so. The European treaties specify that it can exercise banking supervision only in special cases, but not general banking supervision. And there are obvious conflicts of interest between monetary policy and banking supervision."
 Critics ask if the ECB could at the same time recommend closing a bank that would no longer be viable if this would put financial stability in jeopardy? Might the bank also raise a benchmark interest rate when it knew that doing so might cause some banks it monitored would have difficulty coping as a result? Germany was able to retain national supervision over its savings and cooperative banks. However, the national regulators will be working within a network with ECB supervisory staff. It remains to be seen how effective and acceptable the SSM will be given the concerns of some critics.

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