Tuesday, October 23, 2012

Update on the banking union initiative in the Eurozone

Here is the latest on the Eurozone-wide bank regulation initiatives. The area leadership seems to have agreed on some key principles of bank supervision:
  1. The ECB will be the ultimate supervisor for all 6,000+ Eurozone banks.
  2. National regulators will run day-to-day supervision for all banks, except...
  3. The ECB will directly oversee the 25 largest "systemic" banks.
  4. Bank bailouts via the ESM will not take place until the EMU-wide supervision is put in place (supposedly by 2014, though looks unlikely).
  5. The ECB will have the ability to intervene in any of the Eurozone banks.
  6. The ECB would not object if some EU banks outside of the Eurozone were supervised separately.
Reuters: - While he fully expects the ECB to have authority over all the euro zone's 6,000 banks, the Frankurt-based institution would concentrate on the systemically important lenders and delegate routine supervision of the rest to local watchdogs.

"The main division is the centre will directly supervise the 25 odd banking groups and all the rest will be done by national supervisors under the guidance, umbrella, monitoring and definition of practices by the centre," Constancio [ECB VP] said.

The top banks would include Deutsche Bank, BNP Paribas, Santander UniCredit.

The ECB would reserve the right to intervene in any euro zone lender when needed. "There is no ambiguity in the system and there is very extensive use of decentralisation," he said.
Market participants however continue to remain skeptical that this master plan will instill enough confidence in the near-term to materially improve the banking liquidity conditions in the Eurozone.
GS: - Policymakers appear to hope that establishing a road-map to a new and workable Euro area regime will help to stabilize the current situation, as forward-looking markets price future stability into today's asset prices. Given that the credibility of policy announcements is weak, we are skeptical that this can be achieved in the shorter term.
For now the reliance on the ECB will be as a lender to the periphery banking system and a buyer of periphery government debt - not on the ECB as a bank supervisor.



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