When governments in the euro zone agreed last year to give the European Central Bank the power to supervise their banks, that looked like another victory for Mario Draghi, president of the central bank. Now it is looking more like a poisoned chalice.
The E.C.B. will certainly get a large chunk of extra power. But it will also be blamed when banks run into trouble, as they inevitably will. Mr. Draghi is experiencing this firsthand after the recent scandal at Monte dei Paschi di Siena, a bank that has had to be rescued by the Italian state. He has been lambasted for failing to supervise the bank — one of Italy’s largest — properly when he ran the Bank of Italy, although the criticism seems overdone and has often come from his political opponents in Rome.
The potential risks that banking problems pose for the reputation of the E.C.B. are probably even bigger than they are for national central banks. This is because the E.C.B. does not yet have the full set of tools to do the job properly. Moreover, a huge amount is at stake as the E.C.B. is the most credible official institution in the euro zone. If its reputation becomes tarnished because of perceived supervisory failures, that could rub off on its ability to conduct monetary policy or manage crises effectively.
The Bank of Italy rejects the notion that it was guilty of supervisory lapses with Monte dei Paschi. It pointed out in a seven-page document last week the many regulatory actions that it has taken since it first became worried about the bank in the second half of 2009.
The bottom line is that Monte dei Paschi did not blow up, an event that could have set off new panic in the euro zone. The Bank of Italy deserves some credit for avoiding such a crisis. It eventually forced Monte dei Paschi to strengthen its weak liquidity and capital buffers, and to push for the management team to quit.
That said, the Italian central bank seems to have been slow to come to terms with Monte dei Paschi. For example, the bank took nearly a year to raise capital after it was told to. The Bank of Italy also waited more than a year before beginning a second in-depth inspection, even though it had found many problems in its 2010 inspection and discovered more problems after that.
There are mitigating factors: the management was hiding information and dragging its feet; the Bank of Italy did not have the power to kick out individual bankers; the euro crisis was getting worse for much of the period, making it harder to bring the damaged bank into a safe harbor; and Italy’s recent record on bank failures has been better than that of many other E.U. countries.
But such arguments may count for little if and when the E.C.B. faces similar problems with the banks on its watch. Indeed, its position could be worse because the political fudge that set up the euro zone’s “single supervisory mechanism” left some confusion over who was in charge. While the E.C.B. has overall responsibility for supervising the 6,000 banks in the euro zone, day-to-day responsibility will be left with the national supervisors.
This could prove troublesome. If a national supervisor like the Bank of Italy could not stay on top of Monte dei Paschi, how much harder will it be for the E.C.B., which is based in Frankfurt, to do so?
It may not be able to spot which banks are in difficulty. In some cases, national supervisors — who may be jealously guarding their fiefs — may not even pass on relevant information. But if a Greek or German bank gets in trouble in the future, the E.C.B. will not really be able to pass the buck.
The E.C.B.’s position as a supervisor will also be difficult because euro zone leaders have not completed the job of setting up a so-called banking union. The critical missing factor is that there is, so far, no “resolution authority.” Such a body would take control of failing banks and sell them off, break them up or wind them down in an orderly fashion.
The European Commission is working on a plan for such a body, but there is no political agreement yet on how it will operate. Until agreement is reached, the single supervisory mechanism is like a half-built bridge. Although the E.C.B. will be able to monitor banks, its powers will be limited if they get into trouble. It will not want to cause mayhem by closing down a big bank, but nor is supposed to keep ailing banks on life support with large injections of liquidity.
This problem is exacerbated by the fact that taxpayers still typically pay the bill when banks get into trouble. Talk of bailing in bondholders rather than bailing them out remains just talk. Witness the €3.7 billion, or $5 billion, rescue of SNS Reaal, the Dutch bank, last week.
Mr. Draghi may hope to avoid having future banking crises damage the E.C.B.’s reputation by having a so-called Chinese wall between the central bank’s supervisory and monetary policy arms. This would be a bit like what exists in the United States, where the Federal Reserve in Washington conducts monetary policy and its sister organization in New York supervises the big banks.
But such a setup would not totally insulate the E.C.B. from blame. Once the new supervisory mechanism is up and running, it may be worth reviewing whether it would be better to spin it off into a separate organization.
Hugo Dixon is editor at large of Reuters News.
Article source: http://www.nytimes.com/2013/02/04/business/global/04iht-dixon04.html?partner=rss&emc=rss