ECB bank supervision

The summer of 2012 was not the best of times for German Chancellor Angela Merkel. The German-French lockstep in the euro crisis came to an end when Socialist Francois Hollande moved into the Elysee Palace. Hollande decided that eurobonds, much hated by Berlin, were the only solution to the crisis and formed an alliance with Rome and Madrid.

And as Spain teetered, a major economy in the eurozone was threatened with bankruptcy for the first time. Madrid's lax banking supervision had long covered up its banks' problems. Financial markets were betting against the euro. But Merkel remained steadfast: There would be no eurobonds as long as she remained in power.

There was little talk of the eurobonds at the 2012 Euro summit. These would have shared eurozone members' debt. Instead, the banking union was born. This is intended to break the vicious cycle between banking crises and state crises through banking supervision, deposit insurance and settlement at the European level.

But for many German economists this amounted to the eurobond under a different name. They saw the proof of this in the decision at the summit to allow the European Stability Mechanism rescue fund to help banks directly, as soon as pan-European banking supervision could be set up with the involvement of the European Central Bank. In other words, European taxpayers would have to pay the debts of ailing banks.

A further development confirmed those fears. In September 2012, European Commission President Jose Manuel Barroso, supported by France, put forward the plan to establish the banking union. It called for the ECB to take over supervision of banks that applied for ESM assistance, beginning at the start of 2013. From July that year, the ECB would then oversee all 6,000 banks in the eurozone. Germany vetoed this obviously unrealistic plan.

Conflicts of interest

German economists also doubt whether the ECB is really the right choice as supervisor. "The ECB has no mandate to do so. The European treaties specify that it can exercise banking supervision only in special cases, but not general banking supervision," Thomas Hartmann-Wendels, a professor of banking at the University of Cologne, said. "And there are obvious conflicts of interest between monetary policy and banking supervision."

Critics say the move leaves important questions unanswered. Can the ECB seriously recommend the closure of a bank that is no longer viable when the move would also jeopardize financial stability? Or would it raise its benchmark interest rate, knowing that the banks it monitored would have trouble coping with this difficult step?

The German government shares these concerns and has urged a strict separation between the two areas within the ECB. Finance Minister Wolfgang Schäuble has spoken of a "Chinese wall" to be built between monetary policy and supervision.

Schäuble rejected the 2012 decision to tap ESM funds, saying the mechanism is not responsible for existing crises. Spain's hope to rehabilitate its banks with European money failed.

Germany can wait

The tug of war over banking supervision continued. While France wanted to pick up the pace, Germany gave the other euro countries the feeling it was playing for time. The start date for banking supervision was repeatedly postponed. Finally, a year ago, it was agreed that it would start on November 4, 2014.

But the fact that the single currency failed to break apart had much to do with the promise of ECB chief Mario Draghi to preserve the euro at all costs. After all, few speculators want to bet against the deep pockets of the central bank.

And while France's Daniele Nouy will be in charge of banking supervision, Germany has prevailed in its demand that the ECB should not bear responsibility for all 6,000 banks in the eurozone, but only for the largest 120. This means that the German savings and cooperative banks remain under national supervision.

For Elke König, head of German financial regulator BaFin, the start of ECB supervision has nonetheless had a major impact on her agency. "We will be working in a network in which the ECB and its employees bear responsibility for the supervision of these banks."

In other words, the ECB and the national supervisors will ideally work hand in hand. No problem will be swept under the carpet. But König has her doubts that the ECB will be a strict overseer.

One example is the current ECB program for preferred treatment of the banks that grant loans to the real economy: "If you support this, you might have a problem, if you tell a bank it has too many bad loans on its balance sheet."

In the long run, it may become necessary to take banking supervision away from the European Central Bank, she said.