European banking regulation high on Ecofin summit agenda

Trust is good, but control is better: the old Lenin maxim will be on the minds of finance ministers for more reasons than one at tomorrow’s Ecofin meeting in Brussels.

Their task before Thursday’s final summit of 2012: to pin down an as-yet elusive technical agreement on a new European banking regulator. But Berlin officials have another ambition: to bury once and for all Dublin’s dwindling bank debt ambitions.

The new banking regulator was conceived as a euro zone early-warning system to prevent another financial tsunami. But European capitals remain divided over whether the regulator, operating within the European Central Bank (ECB), should police all 6,000-plus euro zone banks or just systemic institutions, leaving other institutions to existing national regulators.

The ECB, backed by France and others, favours the former solution; Berlin, the latter.

After fruitless talks last week, German officials have begun flying kites suggesting ECB oversight could be extended from purely systemic banks to institutions in receipt of state aid in recent years. This would, at a stroke, transfer regulation of Ireland’s bailed-out banking sector from Dublin to Frankfurt.

Expanding on their ideas yesterday, Berlin officials suggested such an ad hoc arrangement might be a sensible, temporary quarantine measure until EU regulations are in place to wind up banks. But their ambitions don’t stop there.

“Once a new supervisor takes over, there has to be a clean slate,” said a Berlin official yesterday. “Legacy problems will have to be sorted out before a regulatory transfer.”

The “legacy” issue – referring to bank liabilities predating the crisis – has already proven a stumbling block, with Berlin dashing Irish hopes of any bailout break that would incorporate old bank debt.

German officials say there is a need to “look closely” at the issue this week, to copper-fasten agreement on legacy debt as a precondition to agreement on a European bank regulator.

Berlin has already insisted that this new bank regulator must, in turn, be in place before the ESM bailout fund is allowed rescue struggling European banks directly.

Breaking the link

By forcing a legacy debt deal now, however, Berlin seems determined to guarantee no old debt flowing into any future deal to break the link between sovereign and banking debt.

So is that the end of the road for Ireland’s bank debt hopes?

A spokesman for the Department of Finance declined to comment directly, saying: “The single supervisory mechanism is on the agenda for Ecofin meeting on Wednesday.”

The other major German concern is that the regulator has guaranteed separation – a so-called “Chinese wall” – from the ECB’s existing monetary competence. Some in Germany have gone even further on this issue, demanding watertight legal guarantees to prevent a conflict of interest.

“I don’t see how the planned transfer of regulatory competences to the ECB is possible,” said Bundesbank president Jens Weidmann. “In my view a clean legal solution requires a change to the European treaties.” Acknowledging this would mean a delay for the regulator, Mr Weidmann said leaders “can, if required, expedite the necessary decisions”.