Finance: Research, Policy and Anecdotes

Looking beyond the borders of the banking union

As I wrote in an earlier post, the establishment of the banking union has had not only implications for the participating countries, but also for other countries in and outside the EU with Eurozone bank presence. Over the past year, I have been participating in a World Bank project analysing the challenges for small host countries in Central, Eastern and South Eastern Europe and the report has now been published.

 

At the core of the report is the asymmetry between the systemic importance of the subsidiary in the host country and the irrelevance of the host country operation for the overall operation of the parent bank; therefore we refer to these countries as “small host countries”. This exacerbates an asymmetry in rights and powers that can be typically found between home and host supervisors across the globe.

 

While all of these countries in the region share the characteristics of being host to several Western European banks, they are also quite diverse in terms of their relationships with home country supervisors; specifically, the group includes Eurozone countries, such as Slovenia and the Slovak Republic, non-Euro EU member countries, such as Croatia and non-EU member countries (though some candidate countries) such as Albania or Serbia. This differentiation is quite important as we detail in the report.

 

In the Eurozone the distinction between home and host supervisors  has disappeared for significant institutions, where the SSM and the SRM are the only authority within the Eurozone left – while this implies loss of supervisory independence, small host countries gain through participation in Joint Supervisory Teams and Internal Resolution Teams, as long it is host to a subsidiary or significant branch.

 

Contrary to Eurozone hosts, other EU Member States retain their full competences as individual or sub-consolidated host supervisors and resolution authorities. However, they are bound by new rules on supervision and resolution on the EU level.  They have the right to participate in Supervisory and Resolution Colleges, thus gaining access to critical information on the consolidated level about the subsidiaries in their countries.  At the same time, dealing with one supranational authority as home supervisor rather than several national ones can be an advantage.

 

Non-EU member countries, on the other hand, have few rights vis-à-vis home supervisors within the EU. They can  be invited as observers to join supervisory and resolution colleges, but have no right to be invited and their participation is conditional on an equivalence assessment by the EBA and agreement of other college members.   Unlike EU members, non-EU hosts do not have access to the EBA mediation process and there is no basis for joint decisions as under BRRD for home and host supervisors in the EU.  This reduces the bargaining position of non-EU small hosts rather drastically and results – in our opinion – in an uneven playing field.    

 

What are the conclusions (and policy implications) of our report?

 

First, non-EU host supervisors, particularly candidate countries, should participate in all relevant EU supervisory and resolution colleges,  as well as crisis management groups as observers.

 

Second, EU authorities should reach out to non-EU small host countries and improve cooperation with them.

 

Third, Small EU host countries outside the Banking Union should make more use of the EBA mediation service when relevant to ensure their interests are properly protected when it comes to joint decision making in colleges.

 

Fourth, non-EU host candidate countries should adapt EU regulations to fit their national circumstances rather than adopting them blindly, while non-candidate countries should take an even more flexible approach. An approach very much in line with the one we recommend in the recent Making Basel III Work for EMDEs report.