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When symbolism makes sense

Having the European Central Bank as the single supervisor for the continent’s financial institutions will make little real difference to the way banks are scrutinised. But plans for banking union are still a good thing.

Draft legislation published last week to centralise bank oversight with the European Central Bank is unlikely to make much difference to how lenders are supervised.

With 6,000 financial institutions in Europe, it is inconceivable that a single body could comprehensively scrutinise them all. Rather, supervision will continue to be done through national organisations, reporting to the ECB.

More importantly, Europe’s banks are already regulated according to a single set of rules. A bail-out decision, for example, may be a national one, but the repercussions are centralised at the European level — EU state aid rulings can direct banks to cut coupons, or indeed, business lines.

And the rulemaking is becoming more centralised. Basel III is to be partially introduced in Europe through the capital requirements regulation, meaning it will be uniform across jurisdictions. Only the part being implemented as a directive — CRD IV — will be subject to national variances.

The single resolution mechanism needs to take effect for banking union to have its real point — otherwise it is a bit of a halfway house. The resolution regime is due to be tabled after agreements are reached on deposit guarantee scheme transferrals and a crisis management directive.

But none of this is to say that the ECB’s new role as a banking supervisor is not worthwhile.

Sure, the jury remains out on whether it makes sense for a central bank to double as a supervisor. Some worry that it conflicts the independence of the monetary policy decisions. Others note that the banking systems supervised by central banks are the ones that have hit the most trouble in the recent crisis — just look at Spain, Ireland and Portugal.

The counterargument runs that it makes sense for the people with the cheque book to be the ones that enforce the rules. Given that the ECB has handed out €1tr in three year loans to help banks struggling for liquidity, it would make sense for it to take on a closer oversight role.

Having the ECB in control is also likely to reduce moral hazard. Despite the single rule book, market participants believe the ECB will take a less sentimental approach to bank regulation. National supervisors are more likely to feel the pressure to prop up banks that they shouldn’t, for example.

Making the ECB the sole supervisor may be little more than a symbolic play. But that does not make it a bad idea. Sometimes symbolism does the job.

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