World Economy

ECB Begins Banks’ Supervision

ECB Begins Banks’ SupervisionECB Begins Banks’ Supervision

Now that the European Central Bank (ECB) has put major eurozone banks through a stress test, it begins to supervise them. But this is a compromise between Germany and France that is full of conflicts of interest, DW reported.

The summer of 2012 was not the best of times for German Chancellor Angela Merkel. The German-French lockstep in the euro crisis came to an end when Socialist Francois Hollande moved into the Elysee Palace. Hollande decided that eurobonds, much hated by Berlin, were the only solution to the crisis and formed an alliance with Rome and Madrid.

And as Spain teetered, a major economy in the eurozone was threatened with bankruptcy for the first time. Madrid's lax banking supervision had long covered up its banks' problems. Financial markets were betting against the euro. But Merkel remained steadfast: There would be no eurobonds as long as she remained in power.


But for many German economists this amounted to the eurobond under a different name. They saw the proof of this in the decision at the summit to allow the European Stability Mechanism (ESM) 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.

A further development confirmed those fears. In September 2012, European Commission President Jose Manuel Barroso, supported by France, put forward the plan to establish the banking union. It called for the ECB to take over supervision of banks that applied for ESM assistance, beginning at the start of 2013. From July that year, the ECB would then oversee all 6,000 banks in the eurozone. Germany vetoed this obviously unrealistic plan.

Conflicts of Interest

German economists also doubt whether the ECB is really the right choice as supervisor. "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," Thomas Hartmann-Wendels, a professor of banking at the University of Cologne, said. "And there are obvious conflicts of interest between monetary policy and banking supervision."

Critics say the move leaves important questions unanswered. Can the ECB seriously recommend the closure of a bank that is no longer viable when the move would also jeopardize financial stability? Or would it raise its benchmark interest rate, knowing that the banks it monitored would have trouble coping with this difficult step?

The German government shares these concerns and has urged a strict separation between the two areas within the ECB. Finance Minister Wolfgang Schauble has spoken of a "Chinese wall" to be built between monetary policy and supervision.

Schauble rejected the 2012 decision to tap ESM funds, saying the mechanism is not responsible for existing crises. Spain's hope to rehabilitate its banks with European money failed.

The tug of war over banking supervision continued. While France wanted to pick up the pace, Germany gave the other euro countries the feeling it was playing for time. The start date for banking supervision was repeatedly postponed. Finally, a year ago, it was agreed that it would start on November 4, 2014.