A Critical Evaluation of the Eu Single Supervisor Mechnism

Topics: Bank, European Union, European Central Bank Pages: 8 (2874 words) Published: December 6, 2012
The European Banking Union – Easing the Boom and Bust or overregulating an over regulated Industry In light of the last 4 years and our own slip in status to Europe’s ‘Wilkins Micawber’ , there could be call for Ireland to support the kind of banking unification and responsibility sharing that the European Commissions proposed single supervisory mechanism. There could equally however be scepticism over allowing the institutions which have imposed our own austerity upon us to have greater regulatory control over our stagnant banking industry. In my opinion, at least at a micro (and somewhat economically patriotic level) I think that this system would ultimately benefit us in acting as a watchdog to an industry that has behaved more like its US counterparts than its European neighbours in recent years. Having said all this I’d like to examine this issue at a macro level to discuss the benefits this new mechanism of the ECB could have for the EU as a whole in protecting its banking industry from the dangers of a boom and bust economy. To do this I’ll first lay out a background to the current crisis, as an indication of the problems this Union would try to fix, and then I will evaluate whether or not this proposal is the best means of solving the aforementioned problems. Finally we’ll look at how this proposal would shift the current regulatory landscape. So first let’s look briefly at why we are where we are today. While we can look at the multitude of factors which met to create this perfect storm of financial chaos, for the purposes of this essay I think it’s best to draw from the conclusions of Carmassi et al i.e. That lax monetary policy and excessive leverage led to massive instability and liquidity problems that compounded the effect of a natural economic downturn. What this says in effect is that, because banks became so overleveraged that when the economy took a natural downturn and house prices began to fall, the problem was exaggerated leading to financial runs which banks did not have the liquidity to match. Secondary to this is the argument an argument that innovation and securitisation in search of higher yields further contributed to the instability. Take for example the tranched mortgage bond system in the US, where mortgage securities where combined into unit and then split (Tranched) into units of different credit rating. This created essentially riskier AAA credit ratings because any AAA tranches lay at the very edge of AAA secure and so were vulnerable to any slight change in house prices. However the AAA credit rating combined with the possibility of insuring an investment with Credit Default Swaps gave the perception of a low risk, high yield investment while not necessarily acting as one. The really concerning part of this is that this is not a device that developed over time amongst different institutions but rather originated from a single trader at the Solomon Brothers bond trading desk at the start of the 80’s with the express intention of allowing Solomon to dominate the mortgage bond market. The reason I consider this a secondary argument however is that firstly it is mainly a Wall Street trend and secondly there is a strong reasoning that with strong monetary policy combined with good capital requirements would reduce reckless betting on asset price increases. That said however it is still worth considering how the proposed banking Union would affect this practice. So now that we understand what needs to be fixed within our banking system we can critically evaluate whether or not a single supervisory mechanism is the best means of correcting this problem. This proposal is essentially centralizing all EU banking supervision and monetary regulation. It would grant the ECB the power to oversee the activities of 6000 Eurozone banks. Amongst these powers would be the ability to authorize banks, ensuring banks have enough liquid capital to safely operate at a loss and appointing national supervisors to...
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