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

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. 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. 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. 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. 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. 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. 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. 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. 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