UK on collision course with Germany over eurozone banking regulator

In a secret British negotiating document, seen by The Daily Telegraph and distributed in Brussels, the Treasury has argued that leaving smaller German banks outside the proposed bank union would “pose significant risks to euro area financial stability”.

Under the banking union plans unveiled by the European Commission on Wednesday, the European Central Bank (ECB) could be given sweeping new powers to supervise eurozone banks, including the authority to issue and withdraw banking licences.

Jose Manuel Barroso, president of the EC, said the banking union was key to solving the debt crisis and to achieving the wider goal of creating a “federation of nation states” in Europe.

But on Wednesday Angela Merkel, the German chancellor, said that only big banks should be centrally supervised by the new regulator. “It’s not about supervising every bank and in any case the ECB can’t do that. Rather, it’s about the quality of the supervision, not just about the quantity,” she said.

Britain has made it clear that it will not join a bank union but backs the broadest plan for the sake of achieving stability for the single currency.

The British paper said: “Seeking to limit the banking union merely to the largest banks, or cross-border banks could lead to gaming behaviour and other distortions.”

It added: “There is also ample precedent to suggest that it is not only the largest banks that may cause systemic instability. The examples of the Spanish Cajas and German Landesbanks illustrate the fact that small and medium-sized banks may in aggregate pose significant risks to euro area financial stability, and medium-sized institutions may do so individually in times of stress.”

In the paper, the Treasury also listed a series of demands it wants to be included in the banking union’s legal framework in order to protect Britain’s financial services industry.
“The eurozone banking union must not undermine the single market,” the paper said. “The principles of non-discrimination, freedom of establishment and free movement of capital within the EU should be firmly entrenched in the founding legal instruments, as well as an unambiguous objective to support the single market.”

It added: “State aid rules must be respected. And the design of the banking union should clearly tackle the implicit guarantee for banks, which is a major distortion to the single market.”

Sharon Bowles MEP, who chairs the European Parliament’s Economic and Monetary Affairs Committee, said: “There must be a duty of care from the ECB to the single market. The interaction of the ECB and EBA needs adjustment to make sure it is fair for all.”
However, experts warned that Britain will have to work to ensure the City is not damaged, particularly its plans to boost the role of the London-based European Banking Authority (EBA).

Paul Edmondson, of the law firm CMS Cameron McKenna, said: “UK-based banks will not escape the new ECB supervisory regime, in that the ECB will be the host supervisor for their branches and cross-border services in eurozone countries.”