There seems to be general agreement that neither the outbreak nor the severity of the financial crisis has been due to a lack of harmonised EU banking regulations. Nevertheless, on 23 September, the European Commission has submitted sweeping proposals for a “European Systemic Risk Board” (COM (2009) 499 final) and a “European Banking Authority” (COM (2009) 501 final). While the role of the European Systemic Risk Board is to be merely advisory, the European Banking Authority would have far-reaching powers.
At the top of the European Banking Authority would be a “Board of Supervisors” composed of the heads of the national public authorities competent for the supervision of credit institutions plus some non-voting members from the Commission, the European Central Bank, the Systemic Risk Board etc. (Art. 25). The Board of Supervisors would issue binding guidelines for the national supervisors (Art. 8). It would decide by qualified majority (Art. 29) – the British member could be outvoted.
Compliance with the guidelines would be monitored by a “Management Board” composed of four members elected by the Board of Supervisors from its members and a chairperson representing the Commission (Art. 30,1). The Management Board would decide on the basis of a majority of the members present (Art. 30,2). The Management Board and the Board of Supervisors together form the European Banking Authority.
If the Board of Supervisors and the Commission consider that a national supervisory authority is not complying with the guidelines, the Board of Supervisors may “adopt an individual decision addressed to a financial institution requiring the necessary action to comply with its obligation under Community law including the cessation of practice” (Art. 9,6). Thus, a qualified majority of the EU Board of SupervisorsÂ may decide to close a specific bank, say, Deutsche Bank, against the will of the German authorities.
On 2 December, the EU Council of Finance Ministers decided that the member-state concerned can take the issue to the Council of Ministers or even the European Council but the decision there will still be taken by qualified majority.
In the Explanatory Memorandum attached to the proposal, the Commission claims that the European Banking Authority “can, in line with the Court’s case law, be established on the basis of Article 95 of the Treaty”, i.e., by qualified majority voting in the Council. This is quite doubtful because Article 95 presupposes that the legislation improves the functioning of the internal market as defined in Article 14. Article 14 defines the internal market as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”. However, differences between national banking regulations do not constitute barriers to capital movements. Thus, it is not Article 95 but Article 96 which applies. Article 96 requires a unanimous decision of the Council. However, the European Court of Justice may fail to make this distinction. It usually sides with the Commission because it shares the latter’s vested interest in centralising power at the EU level.
The Commission is responding to suggestions from the French government. The bulk of its proposals has been developed in the De LarosiÃ¨re Report. The Commission appointed Mr. De LarosiÃ¨re, a former governor of the Banque de France, as chairman of an EU study group. However, the proposals are also supported by Bundesverband deutscher Banken (the German banking lobby). France and Germany are known to have more restrictive banking regulations than the UK (which, however, did not protect them against contagion from the US). They regard the crisis as an opportunity to reduce London’s competitive advantage. In the economics literature this is called “the strategy of raising rivals’ costs”. Other examples are the EU labour market regulations and the Droit de Suite Directive regulating the European arts market. Both have been pushed by French governments, and both have been directed against the UK and other more liberal countries. In the new European Commission, Michel Barnier, a Frenchman, will succeed the liberal McCreevy (Ireland) as Commissioner for the Internal Market. As such he will be in charge of financial market legislation and regulation. Was this a French condition for re-appointing Barroso? Clearly, the strategy of raising the regulatory cost of the City of London is a top priority of French policy.
The legislation on the European Banking Authority is to be finalised very soon. This is surprising. Its alleged purpose is to forestall another financial crisis – not to fight the current one. Why is there such a hurry? Is it because the majority of the Council, the European Parliament and the Commission want to create a “fait accompli” before the general election in the UK? A Conservative government might insist that the Council may adopt this legislation only unanimously.
There is no need for “harmonised” EU banking supervision. Each member country has a perfectly sufficient incentive to regulate its financial institutions in an optimal way. The crisis has been due to error, and error cannot be avoided by centralising economic policy. Learning requires diversity, i.e., decentralised experiments. Regulatory cartels lead to overregulation.
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