Lords Committee publishes report on European Banking Union: Key issues and challenges

• European Banking Union: Key issues and challenges 
• EU Sub Committee on Economic and Financial Affairs

The Committee warn that banking union poses a significant threat to the single market, and stress that the European Central Bank (ECB) must be held accountable to national parliaments for its new powers. Voting rules in the ECB and the European Banking Authority must ensure that the rights of non-eurozone countries are protected.

Commenting, Lord Harrison, Chairman of the House of Lords EU Sub-Committee on Economic and Financial Affairs, said:

"Tomorrow the Government must go into battle at the critical European Summit to fight for the City of London to retain its premier position as the centre of EU financial services. It is vital the UK Government get the negotiations right so that the Banking Union does not undermine the single market as a whole and the single market in financial service in particular, which is so vital to the UK and the City of London. And it must not threaten the position of the UK and other countries who choose to remain outside of the European Banking Union.

The Commission's original proposals failed to meet these concerns, so the Government must urgently secure a deal that is right for the City and right for the single market. Whether this requires treaty change remains to be seen, but adopting rushed and deficient legislation would be the worst of all outcomes.

While the UK will not participate in banking union, we fear that the Government's confidence that the City of London's pre-eminence may be retained could prove misplaced. A eurozone banking union could place the single market for financial services under severe strain, with worrying implications for the UK. The Government must do all in their power to ensure London remains on top."

Today's report makes clear that a banking union across a select number of EU Member States risks undermining the single market and the authority of bodies representing all 27 Member States such as the European Banking Authority, particularly as the European Central Bank takes on an increasingly dominant position. The Committee say that, in order to protect the single market, EBA voting rules should be reformed to give more power to countries with the largest financial service sectors.

In the context of recent high profile calls for EU financial services to be brought within the eurozone, the Committee warn that UK isolation in debates of such fundamental importance would be disastrous. They say that the Government must do everything necessary to ensure the UK’s role is not diminished.  

Recommendations in the report include:

• Banking supervision should be overseen by the European Central Bank. But this will place massive power in the hands of one organisation. It is vital that the ECB is held properly accountable both to the European Parliament and National Parliaments for the powers that it holds.
• The Committee are not convinced that an effective banking union can be created within the existing constraints of the European Treaties. EU leaders need to decide if treaty change is a price they are willing to pay to create a viable banking union.
• For banking union to be effective it will require a coherent three-pronged approach including a Single Supervisory Mechanism, a common resolution mechanism and a common deposit insurance scheme. The Committee regret that political pressure from Germany has led to the latter two elements being kicked into the long grass.
• There must be effective equality in decision-making within the ECB between eurozone and non-eurozone countries who participate in the banking union. Arrangements need to be devised that are satisfactory to non-eurozone countries who wish to take part.

The report has been published ahead of the European Summit on 13 December, where agreement on elements of banking union, including the proposed Single Supervisory framework, will be sought. The Committee will continue to scrutinize the banking union proposals as they develop in 2013.