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National Institute of Economic and Social Research
European Banking Union: democracy,
technocracy and the state of integra...
National Institute of Economic and Social Research
A UK perspective
UK joined EEC in 1973
 Scepticism about federalism / ...
National Institute of Economic and Social Research
UK integration with EU
Financial services particularly important to bot...
National Institute of Economic and Social Research
So far EU very accommodating
UK has negotiated / won some surprising vi...
National Institute of Economic and Social Research
Two major central banks and one EU
Are two sets of regulations consiste...
National Institute of Economic and Social Research
Two major central banks and one EU
Is major cross-border banking (UK an...
National Institute of Economic and Social Research
Is this an Optimal Financial Area (OFA)?
How will the SSM and SRM funct...
National Institute of Economic and Social Research
EBU would have governance issues for UK
‘British dilemma’ could in theo...
National Institute of Economic and Social Research
European Banking Union: democracy,
technocracy and the state of integra...
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Integration without democracy II? | European Banking Union – Democracy, Technocracy and the State of Integration

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Conference: European Banking Union: Democracy, Technocracy and the State of Integration - Global Governance Programme, Robert Schuman Centre for Advanced Studies, European University Institute

By: Angus Armstrong, National Institute of Economic and Social Research

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Integration without democracy II? | European Banking Union – Democracy, Technocracy and the State of Integration

  1. 1. National Institute of Economic and Social Research European Banking Union: democracy, technocracy and the state of integration Integration without democracy II? Angus Armstrong 22nd May, 2015
  2. 2. National Institute of Economic and Social Research A UK perspective UK joined EEC in 1973  Scepticism about federalism / subsidiarisation in any form – most centralised government in an advanced nation (since 1680)  UK famously negotiated four opt-outs from the Maastricht Treaty including from EMU to maintain ‘economic sovereignty’  EU is not itself in a ‘steady state’ but either shift toward federalism or fewer members of euro zone  Any lack of integrity (consistency, wholeness) of financial arrangements will be exploited by financial markets Inevitable that UK would have an in/out referendum
  3. 3. National Institute of Economic and Social Research UK integration with EU Financial services particularly important to both UK and EU  UK is highly integrated with EU in terms of economic flows: half of exports destined to EU, 60% of direct investment from EU and half of all migration with EU  Financial services are particularly important to UK (and fiscal sovereignty). E.g. banking assets > 450% of GDP and 150 foreign banks have branches and 100 have subsidiaries in UK.  UK essentially hosts large part of EU wholesale financial services: host to 25% of EU bank assets, 40% of euro capital and money markets and 70% of derivative trading in euro  But, there will be two (major) central banks and one integrated market: is this internally consistent?
  4. 4. National Institute of Economic and Social Research So far EU very accommodating UK has negotiated / won some surprising victories  ‘Double majority’ voting at EBA affords UK (assuming it carries non-Euro countries) some protection from regulation  But the powers of the EBA are at risk of being overshadowed by ECB and as nations join EBU then the UK would effectively be operating a veto. Is this really sustainable?  ECB has agreed to provide swap lines for euro business for CCPs in UK – contrary to earlier ‘point of principle’ position (although principle not conceded)  A central issue is governance of ECB: makes it impossible for UK to join the EBU (assuming will retain sterling)
  5. 5. National Institute of Economic and Social Research Two major central banks and one EU Are two sets of regulations consistent with stability?  Article 1 of SSM regulation “full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions”  One the one hand EU has common internal market rules (e.g. competition and state aid) but on other hand Bank and ECB will ‘compete’ on financial regulation  Institutions fund in one market to supply finance in another  Experience shows that separate currency will not adequately isolate UK and EBU from each others’ policy actions (Rey)
  6. 6. National Institute of Economic and Social Research Two major central banks and one EU Is major cross-border banking (UK and EU) with two resolution authorities consistent with UK fiscal sovereignty?  The more integrated two sovereign regions, the more financial resolution in one impacts on the other (e.g. Lehman)  Six of 30 GSIBs in EU are located in UK. ECB can close a branch which could have major fiscal consequences for UK  Even as subsidiaries of Banking Groups operating within UK may be decided by SSM?
  7. 7. National Institute of Economic and Social Research Is this an Optimal Financial Area (OFA)? How will the SSM and SRM function in a crisis?  An OFA has clear demarcation of responsibilities  In UK a MoU between Bank of England and Treasury states that when there is risk of a capital loss to liquidity support, Treasury makes decisions and Bank is agent (possibly in secret)  If the SSM considers an institution insolvent (a high bar) then responsibility passes to SRM o Who decides bail-in of going-concern impaired institution? o Could this take place ‘overnight’ and in secret? o Will SRM have expertise?
  8. 8. National Institute of Economic and Social Research EBU would have governance issues for UK ‘British dilemma’ could in theory be solved by joining EBU  But UK will not do so unless joins euro zone (very unlikely) as no seat on the ECB Governing Council. Treaty issue. QE in UK and ECB reflect different market philosophies  QE / credit easing by ECB without political scrutiny would be difficult for UK parliament (notion of sovereignty) Does pooling of sovereign risks create moral hazard  Not obvious that de-linking banking / sovereign risk will improve incentives for economic management
  9. 9. National Institute of Economic and Social Research European Banking Union: democracy, technocracy and the state of integration Integration without democracy II? Angus Armstrong 22nd May, 2015

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