EU ECONOMIC AND FINANCIAL AFFAIRS SUB-COMMITTEE

Transcription

1 EU ECONOMIC AND FINANCIAL AFFAIRS SUB-COMMITTEE European Banking Union: Key issues and challenges Correspondence with Ministers on the Government Response to the Committee s Report Contents LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 11 FEBRUARY LETTER FROM THE CHAIRMAN TO THE UK GOVERNMENT, 26 FEBRUARY LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 27 MARCH LETTER FROM THE CHAIRMAN TO THE UK GOVERNMENT, 16 APRIL LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 06 MAY

2 LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 11 FEBRUARY 2013 Letter from Rt Hon Greg Clark, Financial Secretary, HM Treasury to the Chairman Thank you for your thorough and insightful report on the European Banking Union, published on 12 December You outline many pertinent issues, and raise a number of salient questions, and I am grateful for the Committee s expertise and constructive engagement. The report was the subject of a lively debate in the House of Lords on 24th January 2013 and, in addition, the Economic and Financial Affairs Sub-Committee A discussed the Banking Union at its evidence session on 5th February For the record, I attach transcripts of both sessions, as well as a letter answering Lord Kerr s questions on Member States likely to opt-in to the Banking Union. I trust that these sessions provided detailed responses to your questions and offered the opportunity to probe into the wider issues that you raised. For the sake of completeness it may also be worth making some brief comments on the Government s position. As you are aware, the Government supports proposals to establish a comprehensive banking union. Restoring stability within the Eurozone and breaking the link between indebted sovereigns and unstable banks will require a comprehensive set of measures, including a Single Supervisory Mechanism (SSM), a common framework for resolving Eurozone banks and risk mutualisation elements such as mutualised deposit guarantees and a common fiscal backstop. We have consistently held the view that the banking union is appropriate for the single currency rather than the single market and that the UK will not join. We have therefore sought to ensure that the proposals for the SSM, and for banking union as a whole, contribute to the orderly restoration of euro area financial stability without harming the unity and integrity of the single market or the UK s interests. The approach towards the SSM agreed by the Council in December 2012 made a significant step towards achieving this. For ease of reference I have attached my letter to you outlining the key elements of this agreement. With respect to current progress, negotiations are ongoing and we are working hard to maintain the safeguards agreed in December. The aim is for the ECB to assume in full the tasks conferred under the SSM on 1 March 2014 or 12 months after the entry into force of the ECB Regulation, whichever is later. Finally, and with respect to future developments, we take note of the report s conclusion that the single resolution mechanism (SRM) is necessary, and a common deposit insurance scheme could be helpful, in order to meet the aims of the banking union. The European Commission is currently considering these matters further and is expected to make further proposals later this year. I am copying this letter to William Cash MP, Chairman of the House of Commons European Scrutiny Committee; Sarah Davies, Clerk to the Commons Committee; Jake Vaughan, Clerk to the Lords Committee; Stuart Stoner, Clerk to Lords Sub-Committee A; Les Saunders, Cabinet Office; Rob Douglas and Thomas Kenny, HM Treasury. LETTER FROM THE CHAIRMAN TO THE UK GOVERNMENT, 26 FEBRUARY 2013 Letter from the Chairman to the Rt Hon Greg Clark, Financial Secretary, HM Treasury I am writing in reply to your letter of 11 February 2013, written in response to the House of Lords European Union Committee s December 2012 report on European Banking Union: Key issues and challenges. In your letter, you point out that the report has been the subject of a debate in the House of Lords on 24 January 2013, and was also discussed at your appearance before the Economic and Financial Affairs Sub- Committee on 5 February You state that you trust that these sessions provided detailed responses to the Committee s questions and offered the opportunity to probe into the wider issues that were raised. 2 of 9

3 We are grateful to you for your evidence on 5 February, and also for the useful update on the outcome of the December 2012 European Council as set out in your letter of 12 January Notwithstanding these useful updates, we trust that you will be providing the Committee with a considered written response to each of the 24 recommendations set out in Chapter 6 of the report, as is normal practice in relation to Government responses to Committee reports. We would refer you to the Government response to the last report produced by the Sub-Committee, on MiFID II: Getting it right for the City and EU financial services industry, which was sent to us on 26 October 2012, as an example of the type of response that we expect to receive. We look forward to receiving such a response to the Committee s report by 18 March In relation to banking union, we also hereby notify you that we have cleared EM 17787/12, on the ECB s opinion on the banking union proposals, from scrutiny. I am copying this letter to William Cash MP, Chair of the Commons Committee; Sarah Davies, Clerk to the Commons Committee; Paul Hardy, Legal Adviser to the Commons Committee; Les Saunders, Cabinet Office, Kunal Patel, Robert Douglas, Thomas Kenny and Gary McMillan, International Tax Strategy & Co-ordination, HM Treasury. LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 27 MARCH 2013 Letter from Rt Hon Greg Clark, Financial Secretary, HM Treasury to the Chairman The House of Lords European Union Committee has requested a written government response to its December 2012 report European Banking Union: Key Issues and Challenges. HMG welcomes the Committee s report which is both detailed and insightful in its analysis. As you will be aware HMG supports proposals to establish a comprehensive banking union. Restoring stability within the Eurozone and breaking fully the link between sovereigns and unstable banks will require a comprehensive set of measures, including the Single Supervisory Mechanism, a common resolution framework and a common fiscal backstop. The first of these is currently under negotiations with the European Parliament. With regards to the common resolution framework, the Commission is considering these matters further and is expected to make proposals this year. I therefore attach (Annex A) a response to the recommendations made by the Committee. I would also like to take this opportunity to thank the Committee for clearing EM17787/12 on the ECB s opinion on the banking union proposals, from scrutiny. I am copying this letter to William Cash MP, Chairman of the House of Commons European Scrutiny Committee; Sarah Davies, Clerk to the Commons Committee; Jake Vaughan, Clerk to the Lords Committee; Stuart Stoner, Clerk to Lords Sub-Committee A; Les Saunders, Cabinet Office; Rob Douglas and Thomas Kenny, HM Treasury. ANNEX A HMG response to the recommendations made in the Lords European Union Committee Report, European Banking Union: Key Issues and Challenges. Chapter 1: Introduction 1. Who will be Members of the Banking Union? Banking Union is a single currency and not a single market measure. As a result Member States who use the Euro are obliged to participate in banking union. Other Member States may choose to join the Banking Union. The UK has been clear that it will not join the Banking Union. Sweden and the Czech Republic have also publicly stated that they will not be participating in Banking Union at this stage. Other non Euro Area Member States have not made public statements. Their positions are dictated by their domestic political processes and some may wait to see the final details of the whole banking union package before making their decision. Chapter 2: The Single Supervisory Mechanism and the role of the ECB 3 of 9

4 2. Is it appropriate for the ECB, as is proposed, to take on prudential supervisory tasks and, if so, what will the impact be on its monetary policy responsibilities? From a legal perspective it is entirely appropriate for the ECB to take on prudential supervision. We consider that Article 127(6) of the Treaty on the Functioning of the European Union ( TFEU ) is the only appropriate Treaty base for conferring such tasks on the ECB. As the Commission notes in its EM to the Regulation conferring tasks on the ECB, Article 127(6) TFEU expressly contemplates that the ECB may be given specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings. This includes tasks concerning day-to-day supervision. From a practical perspective the ECB is a credible and well resourced institution with sufficient expertise to meet the challenge. Moreover the ECB Regulation has been drafted so that the ECB's monetary policy tasks will be strictly separated from its supervisory tasks to eliminate potential conflicts of interest between the objectives of monetary policy and prudential supervision. 3. What will the impact be on the ECB s governance structure? At its December meeting the Council agreed an approach that provides a robust governance structure with strict separation between supervisory and monetary policy tasks within the ECB. A Supervisory Board, responsible for the planning and execution of supervisory tasks conferred on the ECB, will be established to ensure that the ECB's monetary tasks are strictly separated from its supervisory tasks and to eliminate potential conflicts of interest between the two. Membership of the Supervisory Board will comprise a representative from the national competent authority of each participating Member State including those non- Euro Member States who choose to opt-in -, a Chair and Vice-Chair and four representatives of the ECB all of which shall have voting rights. Decisions of the Supervisory Board will be deemed adopted unless they are actively rejected by the ECB Governing Council. The ECB will also establish a mediation panel, which will resolve differences of view where the ECB Governing Council objects to decisions made by the Supervisory Board. This will include one member from each participating Member State, each with one vote. Finally, a review panel will ensure the procedural and substantive legality of decisions taken by the ECB: decisions taken by the ECB may be referred to the European Court of Justice under Article 263 of the Treaty on the Functioning of the European Union. 4. Which banks should be directly supervised by the ECB and what will be the impact on the role of national supervisors? The ECB will have direct supervisory oversight of credit institutions, financial holding companies and mixed financial holding companies (and potentially the limited supervisory duties over branches which are established in participating Member States) which: have assets over 30 billion; have a ratio of assets: GDP of the participating Member State greater than 20% (unless the total asset value is less that 5billion); or are systemically important to the domestic economy of the participating member state have requested or received financial assistance from the ESM or EFSF. The ECB will also supervise the three most significant credit institutions in each participating Member State. It may choose to take up direct supervision of credit institutions in participating Member States with banking subsidiaries in two or more participating Member States if a significant proportion of its assets/ liabilities are cross-border. The ECB will establish the supervisory framework for credit institutions in participating Member States which it does not supervise directly. It may also decide to exercise directly itself the relevant powers in relation to 4 of 9

5 credit institutions within this category or may do so at the request of the national competent authority of the participating Member State. National supervisors will remain in charge of tasks not conferred on the ECB, for instance in relation to consumer protection, money laundering, payment services, and branches of third country banks. They will also remain responsible for the day-to-day supervision of institutions which do not fall in the direct supervision remit of the ECB. 5. What accountability mechanisms need to be put in place? AND 6. Will the ECB be fully answerable to the Council and European Parliament for its supervisory decisions? The need for robust accountability mechanism is widely acknowledged and the ECB regulation reflects this. The ECB will be fully accountable to the European Parliament and to the European Council. This will include a formal process whereby the ECB presents an annual report on the execution of its tasks to the European Parliament, the Council, and the Eurogroup. The Chair of the supervisory board will take responsibility for presenting the report to representatives of these groups and will be scrutinised accordingly. 7. What will be the impact on non Euro area Member States? Non Euro area member states may choose to join the SSM if they wish. However we have been clear that it is not in the UK s interests to do so. There will be no change to the UK supervisory framework (or that of other non participating Euro area Member States) arising from the Banking Union and neither is any change to the existing home-host framework for supervision proposed. The ECB will become an important supervisory interlocutor but, beyond that, home-host relationships between competent authorities in participating and non-participating Member States will continue to be determined in the relevant sectoral legislation, for example the Capital Requirements Directive (CRD). 8. What is a realistic timetable for these reforms to be introduced? Finance Ministers agreed an approach to the proposed regulations at the December ECOFIN. This was a significant milestone in the negotiations. The negotiation process is still ongoing. Nevertheless the aim is for the ECB to assume in full the tasks conferred under the SSM on 1 March 2014 or 12 months after the entry into force of the ECB Regulation (whichever is later). 9. Do these reforms require treaty change? The SSM is being proposed and negotiated under the existing treaty base which provides for specified supervisory tasks to be conferred on the European Central Bank. That said the European Commission has set out a detailed roadmap for a wider banking union and, as the Chancellor has said, the steps that are at the most ambitious end of the spectrum of possible measures relating to a banking union would require Treaty change. However no such proposals have been published. 10. Will the ECB s focus be on the euro area as opposed to the EU-27? The focus of the ECBs supervision will fall upon those Member States who participate in the SSM. However the December agreement included a number of safeguards for the single market, including a duty on the ECB to have regard to the unity and integrity of the internal market in performing its supervisory tasks. 11. What safeguards will there be against the concentration of power in a single institution (the ECB)? It is for the Eurozone to decide how functions should be allocated to the ECB and then divided between the ECB as supervisor and those national competent authorities participating in the Single Supervisory Mechanism. 5 of 9

6 However, we think that the ECB in its capacity as a competent authority should have only the same powers as national competent authorities under EU law. 12. Who will be in charge in a crisis? The ECB will have ultimate responsibility for the supervision of all banks in participating member states. In a crisis, this should provide clarity with respect to supervisory decision making. However, should a bank encounter difficulties, national authorities will remain responsible for resolution measures: proposals for a single resolution authority have not yet been published. 13. What influence will the UK have over the design of the supervisory framework? Colleagues at the FSA/ PRA are engaging directly with their counterparts at the ECB and we anticipate that they will have strong working relationships. A key objective of the Memorandum of Understanding between the Bank of England and the ECB s is to ensure that the ECB s supervisory framework is compatible with the UK supervisory framework and does not impose unnecessary compliance costs to UK cross-border banks. The single rule book, and the supervisory aspects of the EBA s mandate, will set the parameters within which the ECB operates just as they set the parameters within which the FSA/ PRA operate. 14. What appeals system will be in place [at the ECB] and will this be subject to timely and appropriate external legal challenge? A review panel will ensure the procedural and substantive legality of decisions taken by the ECB: decisions taken by the ECB may be referred to the European Court of Justice under Article 263 of the Treaty on the Functioning of the European Union. 15. Will the accountability mechanism function effectively at moments of acute crisis? The need for swift and firm action in moments of acute crisis does not negate the need for proper accountability mechanisms. This is especially true where there may be significant fiscal consequences of decisions made. Sensible accountability mechanisms are in place and these should function during crisis as well as peace-time. That said, certainty on how the SSM will work during a crisis can only be provided through being tested in real world scenarios. 16. Have the banking union proposals become an excuse for inaction towards the Spanish banking sector? The Banking Union proposals have not become an excuse for inaction towards the Spanish banking sector. Provision for the recapitalisation of Spanish banks has been made through the Spanish State s programme with the ESM. Discussions are ongoing in relation to the potential use for the ESM in the direct recapitalisation of banks. European leaders have accepted that there is no one solution to the crisis all measures need to weigh up differing incentives and possible unintended consequences. 17. Will there be an effective mechanism of accountability to national parliaments, particularly where individual supervisory decisions have a significant impact on an individual member state s banking sector? Yes there will be an effective mechanism of accountability to national parliaments. The ECB Regulation text states: When submitting its annual report, the ECB shall simultaneously forward those reports directly to the national parliaments of the participating Member States. National parliaments may address to the ECB their reasoned observations on those reports. National parliaments of the participating Member States may request the ECB to reply in writing to any observations or questions submitted by them to the ECB in respect of the functions of the ECB under this Regulation. 6 of 9

7 The national parliament of a participating Member State may invite the Chair or a member of the Supervisory Board to participate in an exchange of views in relation to the supervision of credit institutions in that Member State together with a representative of the national competent authority. Chapter 3: The impact of banking union on the EBA and the ERSB 18. Will voting arrangements in the EBA defend the interests of the single market as a whole? Under the text agreed by the Council, the EBA is explicitly required to strive for consensus. This is aimed at ensuring that decisions are taken in the interest of the single market as a whole, rather than in favour of one particular member state or group of member states. Moreover, where decisions are put to the vote, the arrangements seek to ensure that the views both of member states participating in the SSM and of member states not participating in the SSM are represented. Key decisions will therefore be made by a qualified majority of all members and a simple majority of participating Member States and a simple majority of non-participating Member States. 19. Will the ECB be subject to the same procedure of mediation as other supervisors, in principle as well as in practice? Yes, under the proposals EBA powers and decisions (used, for example in cases of binding mediation) shall apply equally to the ECB and other supervisors including the FSA/ PRA. The text agreed by the Council proposes that, where there is an alleged breach of Union law or a dispute between competent authorities, the matter will be referred to an independent panel. The decision of the panel must be adopted by a simple majority of participating Member States and a simple majority of non-participating Member States. We are strongly encouraged by the level of agreement among member states on the need to ensure parity between the ECB and other supervisors in this respect. 20. What effect will the proposals have on the ESRB? The proposals do not change the ESRB powers or its mandate. We recognise that the ECB will have a mandate for macroprudential supervision in the SSM, in the same way that national supervisors have a mandate for macroprudential supervision, and ensuring that this continues to be compatible with the ESRB s role will be important. We note also that the ESRB will be subject to the review of the European System of Financial Supervision, alongside the European Supervisory Authorities. Chapter 4: Further steps towards banking union 21. What is the government doing to make the case for a common deposit insurance scheme in Europe? Our immediate priority in relation to banking union is to conclude the negotiations relating to the SSM which are still ongoing. We support the concept of a single resolution mechanism and a common deposit insurance scheme in the context of a full banking union. We expect the Commission, to presents its proposals on the SRM later on this year, but we recognise that achieving a common deposit insurance may take time and that it raises difficult questions for those who are involved. We also note the role that the Recovery and Resolution Directive has to play in establishing a common framework for recovery and resolution - that is, a credible set of minimum tools and powers to intervene quickly to avert or manage the failure of financial institutions, particularly in a cross border context. 22. Will the SRM break the link between banks and sovereigns? Proposals for the SRM have not yet been published and, without knowing what form any proposed SRM would take, we do not know whether or not it would break the link between banks and sovereigns. It is clear, however, that the SSM on its own will not break the sovereign-bank link. The SSM includes no form of burden 7 of 9

8 sharing for recovery and resolution costs. However the SSM will contribute to improving the quality of supervision across the European Union and to improving the resilience of banks under its jurisdiction. Chapter 5: The impact on the UK and the Single Market 23. How will the government ensure that the UK retains its competitive advantage [with respect to financial services] in Europe? The UK will continue to offer strong and well-respected regulation and supervision, as well as culture, diversity, and access to top quality services and a skilled workforce that is unparalleled in other financial centres. Clustering effects mean that there are national, regional and global services and clients within close proximity. None of these advantages would change: the UK will continue to be an unparalleled global financial centre outside a banking union. UK financial services firms will continue to work for and with those inside the Eurozone. And they will continue to export their skills and services elsewhere. Moreover the UK plays a significant role in international debates on financial services through the G20, the Basel Committee on Banking Supervision and the Financial Stability Board. This will not change. 24. How is the government ensuring that it exerts a positive influence on banking union discussions? The UK has been a constructive voice throughout the Banking Union debate. Whilst making it clear from the outset that we will not participate, we have provided input drawing upon the expertise in financial services we have to help guide the design of an effective system. The government has worked hard to engage with counterparts from all member states and on a number of levels. We fully expect this to continue throughout the remaining negotiations. We enjoy strong bilateral relationships and constructive dialogue with many of our European partners as well as with the European Commission and continually seek to strengthen these relationships through diplomatic channels and technical discussions. LETTER FROM THE CHAIRMAN TO THE UK GOVERNMENT, 16 APRIL 2013 Letter from the Chairman to the Rt Hon Greg Clark, Financial Secretary, HM Treasury Thank you for your letter of 27 March 2013, written in response to the House of Lords European Union Committee s December 2012 report on European Banking Union: Key issues and challenges. We are grateful to you for this response, but would ask for further clarification of a number of issues. First, at section 1 of Annex A to your letter, you state that the UK, Sweden and the Czech republic have made it clear that they will not join the Banking Union, but that other non-euro area Member States have not made public statements. Given the implications for the review of voting arrangements in the EBA, we would ask you to write to us to inform us on each occasion when a non-euro area Member state makes public its position. At section 4, you respond to the Committee s queries as to which banks should be directly supervised by the ECB, and what will be the impact on the role of national supervisors. You set out the various criteria under which the ECB will assume direct supervisory oversight, but do not state how many institutions will be affected. How many banks do you estimate will be brought under the ECB s direct supervisory oversight? We would be grateful for a numerical breakdown of the institutions affected by Member State. Finally, you state at section 23 that the UK will continue to be an unparalleled global financial centre outside a banking union. We again urge you not to take the UK s position for granted, but to continue to work to ensure the UK retains its competitive advantage with respect to financial services. We would be grateful for a response to these queries, as well as any update on Banking Union negotiations, by 8 May I am copying this letter to William Cash MP, Chair of the Commons Committee; Sarah Davies, Clerk to the Commons Committee; Paul Hardy, Legal Adviser to the Commons Committee; Les Saunders, Cabinet Office, Kunal Patel, Robert Douglas, Thomas Kenny and Gary McMillan, International Tax Strategy & Co-ordination, HM Treasury. 8 of 9

9 LETTER FROM THE UK GOVERNMENT TO THE CHAIRMAN, 06 MAY 2013 Letter from Rt Hon Greg Clark, Financial Secretary, HM Treasury to the Chairman Thank you for your letter of 16 April I am responding to the questions you raised, following on from the Government s prior response to the Lords report, European Banking Union: Key Issues and Challenges. Firstly, Sweden and Czech Republic remain the only non-euro Member States who have made public statements about not joining Banking Union. In light of the importance Banking Union membership has with regards the review on European Banking Authority (EBA) voting arrangements, I will endeavour to inform you on each occasion when a non-euro Member State makes public its position on joining the Single Supervisory Mechanism. Secondly, you asked for a breakdown of which Eurozone banks would fall under the scope of the European Central Bank s (ECB) direct supervisory oversight. The information relating to this procedure has not yet been made public. However, a review of the available literature e.g. Bruegel Analysis ( estimates that between 150 to 200 banks could fall under the ECB s direct scope. Finally, I appreciate your views on not taking the UK position as an unparalleled global financial centre for granted. I can fully ensure you that I do not do so, and I will continue to work hard to ensure that the UK retains its competitive advantage with respect to financial services. I would like to also take this opportunity to provide your Committee with a brief update on Banking Union - Single Supervisory Mechanism (SSM). Trilogues on the SSM, ended in March and a provisional political agreement was reached at Coreper (18 March). Safeguards to protect the operational integrity of the Single Market and the rights of non-euro Member States not joining Banking Union were maintained. The SSM package will now be laid before the Bundestag, as required by German constitutional arrangements, with the expectation that the SSM package would be ratified in July. Formal adoption of the SSM package by the European Council and European Parliament is expected to take place in July The aim is then for the ECB to assume, in full, the tasks conferred under the SSM on 1 March 2014 or 12 months after the entry into force of the ECB Regulation (whichever is later). In terms of next steps, the European Commission has declared its intention to release its proposals on the Single Resolution Mechanism, at some point during the summer. I am copying this letter to William Cash MP, Chairman of the House of Commons European Scrutiny Committee; Sarah Davies, Clerk to the Commons Committee; Jake Vaughan, Clerk to the Lords Committee; Stuart Stoner, Clerk to Lords Sub-Committee A; Les Saunders, Cabinet Office; Kunal Patel and Thomas Kenny, HM Treasury. 9 of 9