It has finally been agreed – the proposal for a common bank supervisor for the Eurozone, a single supervisory mechanism (SSM). The deal means that ECB, the European Central Bank, will begin supervising banks in the euro area from 1 March 2014.

Following the agreement, the ECB will get direct responsibility for banks with assets of more than 30 billion euros, or representing more than a fifth of a state’s national output. This definition covers around 200 banks, and leaves most of Germany’s retail banking sector outside of the scope of the SSM. That was a critical condition for reaching an agreement, since the last four hours of negotiations were spent trying to strike a deal between France and Germany. Despite this compromise, the ECB will have powers to intervene in any bank and give orders to national supervisors if deemed necessary.

Tough negotiations

For non-euro countries, negotiations were tough. A first topic of major concern has been the voting rights in the planned ECB Board of Supervisors, where countries outside the euro would only get observer status. This has been changed, and non-euro countries that decide to join the SSM will now get full and equal voting rights. However, the decision of the Board of Supervisors can still be overruled by the ECB Governing Board, where only Eurozone members sit.

The second important issue for non-euro countries was the voting rules in the European Banking Authority (EBA), responsible for overall coordination of supervision in the EU. The new deal means that decisions in the EBA require three things: qualified majority among all countries, simple majority among non-euro countries, and simple majority also among euro countries. This rather complicated solution will ensure that Eurozone countries cannot overrule the whole EU-27 in the EBA with their views.

Sweden, Czech Republic and the United Kingdom have decided to stay outside the banking union, while other non-euro countries have been more positive towards joining.

A new reality?

The banking union project is the biggest EU financial integration project since the creation of the Euro. With the first step now adopted, it means that several banks will end up under ECB supervisory rule, such as Nordea, Danske Bank, and OP-Pohjola. Other banks that would qualify into the new framework is for example SEB, Swedbank and Handelsbanken.

Several other key issues also spring to mind. The democratic accountability of the new supervisory structure is not fully addressed in the deal. The issue of conflict of interest between the ECB’s monetary and supervisory tasks seems to be bigger than before, now that the Governing Board will follow the supervisory work closely and has been given veto power. And the important question of keeping a level playing field for banks inside and outside the SSM is still there – will banks from countries that do not join the SSM see their financing costs go up?

The background for the proposal is the vicious circle of government debt and banks in crisis that is creating serious economic difficulties across the Eurozone. To reinstate confidence in banks and governments, the ECB will monitor banks directly. Thereby, the European Stability Mechanism can give money directly to banks that run into trouble, without having to be bailed out by weak governments.