European Banking Union: EUC Report

Lord Harrison Excerpts

Thursday 24th January 2013 Lords Chamber

Moved By

[Lord Harrison]

That this House takes note of the Report of the European Union Committee on the European Banking Union: Key issues and challenges (7th Report, HL Paper 88).

[Lord Harrison]

My Lords, some 20 years ago I led a vote in the European Parliament for the Monetary Sub-Committee, and included among my group was Pierre Moscovici, who is now the Finance Minister of France. It was a vote to approve Alexandre Lamfalussy as the new president of the European Monetary Institute, the forerunner of the European Central Bank, of which Mario Draghi is now the distinguished head. In my middle-aged enthusiasm, I then issued a press release that declared, “Europe’s new bank manager elected”. It met with a quiet voice in the world urbi et orbi.

Now, however, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled European Banking Union: Key Issues and Challenges, and I wonder whether I was right. The report is based on work undertaken by the EU Sub-Committee on Economic and Financial Affairs, which I chair. The report was published in December, immediately before the banking union proposals were discussed at the European Council, and we were pleased to have the opportunity to inform the Government of our views as negotiations commenced. I thank Greg Clark, the Financial Secretary to the Treasury, not only for listening to us beforehand but for reporting to us immediately afterwards.

Our report was based on evidence received from a stellar cast, including representatives of the banking sector, economic experts, think tanks, the German ambassador to the UK, the vice-president of the European Central Bank and the Financial Secretary to the Treasury. On a visit to Brussels in October, the committee also met with senior MEPs, the chairman of the European Banking Authority, the European Commissioner for Internal Market and Services, Michel Barnier, and the President of the European Council, Herman Van Rompuy. The committee was also assisted in its work by Professor Eilis Ferran of the University of Cambridge, who acted as our specialist adviser for the inquiry. I thank all our witnesses, who contributed so richly to the inquiry, as well as Stuart Stoner, our clerk, and Rose Crabtree, the policy adviser to the committee.

One of the characteristics of the euro area crisis has been its oscillation between periods of relative calm and moments of febrile crisis. One such crisis happened in June last year. Concerns over the systemic link between struggling banks and indebted sovereign states came to a head. Spanish 10-year bond yields had reached a euro-era high and recapitalisation of its seriously indebted banking sector seemed inevitable.

European leaders, so often criticised during the crisis for their lamentable lumbering tardiness, at last sprang into action. At that month’s European summit, they agreed that the European stability mechanism rescue fund could recapitalise banks directly rather than via sovereign states. The only proviso was that an effective single supervisory mechanism of euro area banks had to have been established under the authority of the European Central Bank. At the same time, President Van Rompuy was asked to take forward,

“a specific and time-bound road map for the achievement of a genuine Economic and Monetary Union”.

That was the genesis of the so-called “banking union”, by which European leaders sought to restore much-needed credibility and stability to the euro area banking system.

The single supervisory mechanism proposals were duly published by the Commission in September, but the further steps towards banking union initially envisaged by President Van Rompuy—a single European resolution scheme and, in particular, a single European deposit insurance scheme—were quickly put on the back burner because of the fears of Germany and some others that they would mark a too pronounced step towards debt mutualisation. Our committee expressed regret that the Van Rompuy model was so quickly undermined.

In the light of this change, our report necessarily focused on the first element of banking union—the single supervisory mechanism. We sought to address a number of the key questions. Was it appropriate for the European Central Bank to take on a supervisory role? What would be the impact on its governance structure? Which banks should be directly supervised by the ECB? What accountability mechanisms were needed? What would be the impact on non-euro area member states, and when could such reforms be realistically and reasonably introduced?

Our conclusions were as follows. We noted the worldwide trends, including here in the UK, towards combining supervisory and monetary policy functions in one institution. In our view, giving supervisory responsibility to the ECB was indeed the only viable option. Yet this would create a significant concentration of power in one institution. Again, it was vital to ensure that there was no conflict of interest between the ECB’s twin tasks of exercising monetary policy and the supervision of the banks. The ECB needed to be fully accountable for its supervisory role, including to national Parliaments, and I am pleased that the vice-president of the ECB came before my committee to report on the proposals.

We believed that it was unrealistic to expect the ECB to engage in intensive supervision of all 6,000 euro area banks, yet the crisis has demonstrated that it is not just the largest institutions that can pose a systemic risk, as exemplified by Northern Rock in this country. We concluded that, while the ECB would concentrate on the day-to-day supervision of only the largest and most systemically important banks, it should retain the power quickly to assume responsibility for the supervision of smaller banks as and when required. However, this model could work only if there was close and positive co-operation between the ECB and national supervisors, and I would ask the Minister whether he could comment on that necessity.

One of the key features of the banking union proposal is that non-euro area member states should have the right to participate, but this presented significant dilemmas. How could non-euro area participating member states enjoy equality with euro area member states within the ECB decision-making process, and how would all this impact on those member states that wished to remain outside the banking union, of which of course the United Kingdom has declared through the Prime Minister that it will be one? He has said that,

“you do not need a banking union because you have a single market; you need it because you have a single currency—so Britain should not, and will not, be part of that banking union”.—[Official Report, Commons, 22/10/12; col. 699.]

Yet banking union has profound implications for the UK. We were particularly concerned about the impact on the European Banking Authority, the regulatory agency tasked with developing the single rulebook for financial services throughout the European Union. We feared that a dominant ECB could undermine the EBA’s authority in defending the EU-27 and the single market—in particular, given the likelihood that banking union participants would caucus around a single position advocated by the ECB inside the European Banking Authority’s decision-making process. This raised the spectre of the United Kingdom being consistently outvoted in setting the rules by which the financial sector operates. Given this threat of marginalisation, we urged the Government to do all that was necessary to ensure that the City of London’s leading position was not imperilled and that the integrity of the single market was not compromised. At the very least, the European Banking Authority’s voting arrangements had to ensure that it was able to defend the interests of the single market as a whole.

The Commission’s proposals as originally drafted failed sufficiently to address several of these concerns and it was clear that it had been constrained in its drafting by the need to avoid treaty change. The original plan had been to reach agreement on the package by the end of 2012. In light of the weakness of the legislation, this struck us as wholly unrealistic. Even the revised aim of agreeing a legislative framework by the end of 2012 seemed extremely ambitious.

We were therefore pleasantly surprised when the news broke after our report was published that a deal had been struck, which, the Government assure us, “will preserve the EU’s single market and protect the interests of those remaining outside the banking union”. The commitment to break the vicious cycle between banks and sovereigns was reasserted, as was the intention to bring forward in 2013 a single resolution mechanism proposal. A “double majority voting” principle was agreed whereby decisions in the EBA will be subject to a majority of both participating and non-participating member states in the banking union. The Government have also pointed to the so-called “non-discrimination clause”, which, they argue, “guards against any restriction of the UK’s role as a financial centre in the single market”. That is all very promising but, as ever, the devil is in the detail, and I would ask the Minister to respond to a number of questions.

In recent days, Mario Draghi, Christine Lagarde and Barroso himself have all suggested that the euro area may have turned a corner and the worst of the crisis may be over. Yet we have seen in the past that when the crisis appears to ease, the foot can all too easily come off the accelerator of improved supervision. Last week the Financial Times reported that the commitment in Brussels to break the vicious circle between banks and sovereigns and to take forward proposals for the single resolution mechanism may be weakening. Can the Minister confirm this? What update can he give us on the deal agreed in December? Is everything on track? When will the single supervisory mechanism be operational? What is the likelihood of the further steps towards banking union coming to fruition in the near future?

I also have some questions on the detail of the December deal. The new voting rules in the EBA will be subject to a review only if and when four member states remain outside the banking union. What update can the Minister give us on the position of the other nine non-euro area member states? How likely is it that they will choose to participate, thus triggering a review of the voting mechanisms? What will the UK do in such an eventuality? How does the Minister respond to the scepticism about the double-voting mechanism expressed to my committee only last week by Martin Wolf, chief economics commentator at the Financial Times? In his view:

“The idea that the entire eurozone could agree that this is how we are going to handle the banking industry in order to preserve the currency union and the UK then pipes up and says, ‘We do not like it because it will affect the City’ … in polite terms they are going to say, ‘Go away’”.

The consequences of all this for the UK will be profound, and we warn the Government against undue complacency. Pleased with the deal they may be, but they must continue to be vigilant to the risk of these steps towards integration for the single market and the UK’s place within it.

Finally, it would be remiss of me not to comment on the Prime Minister’s speech yesterday. He said that the single market was the core and the “essential foundation” of the European Union—which I very much agree with—and that Britain must remain at the heart of the single market. He also cited the December deal on banking union as illustrative of the sort of safeguard needed to ensure that the UK’s access to the single market is not compromised.

However, the question of a referendum, which has been dangled in front of us, worries me considerably. In the case of the 1975 referendum, the then Prime Minister, Harold Wilson, asked the then Foreign Secretary, James Callaghan, to go round and get the assurances of other capitals in the community that that was all right. The second problem is that referendums are a newfangled way of dealing with the assessment of public opinion in this country. It begins to take away from the tried and true parliamentary approach that we have had for so long in this country—an example of which is the very report that is before your Lordships this evening—when those who have some expertise assess the matter to be presented before the British people. We need to be very cautious about changing what are tried and true parliamentary approaches.

I look forward to the speeches that are to come and I am sure that all sides of the House look forward to the reply of the noble Lord, Lord Newby. I beg to move.

--- Later in debate ---

[Lord Harrison]

My Lords, I thank all Members who have spoken this evening in what I think has been a stimulating and enlightening debate. I am very grateful to the Minister for promising to write to us on those points that he has not had time to take up. At one point I began to worry when I was accused of being “genial” and “courteous”; but, on a lighter note, I must say that I began to think of the power and persuasiveness of our report when one noted Eurosceptic wandered into the Chamber and, so persuaded by what he heard, came and joined the Labour Benches.

I will finish on two comments made by the noble Baroness, Lady Falkner, which the noble Lord, Lord Liddle, identified. The first is the, perhaps, paucity of contributions from the distaff side of the House. I can tell the noble Baroness that the austerity seminar that our committee is holding next week will feature Vicky Pryce, not only to speak on financial services but also to report on Greece. The other point made by the noble Baroness that the noble Lord, Lord Liddle, identified, which is hugely important, is that these matters are not European; they are British and European. Every report we ever write has a large section on how the United Kingdom will be affected by what is going on within the European Union. It is time that we in this House took these matters seriously and that we had debates at appropriate times for all Members of the House to respond. I close with that hope and thank everyone for contributing tonight.

Motion agreed.