Banca Schizophrenia

The EU's decision to put the ECB in charge of overseeing the eurozone's 120 commercial banks is a task not enshrined in its statutes - let alone one that the euro area central bank was designed to master technically. Ever since EU leaders moved to give the bank those additional powers two years ago, economists have warned of the potential conflicts of interest that this will logically entail. The mandate for banking supervision is in stark contrast to the bank's primary task of maintaining price stability.

Against the background of persistently low inflation in the eurozone in recent years, the debate may sound academic and typically German, indeed. After all, despite years of ECB bashing in this country, the euro has turned out to be more stable than the German Deutschmark was in the decade ahead of its demise in 2002. So how come all the fuss about housing monetary policy and banking supervision under one roof at the ECB?

The main reason for concern is the fact that the emerging conflict between ECB monetary policy, including its controversial announcement to start buying banking assets, and keeping Europe's battered banking sector on a tight leash, is not academic at all. Rather, the move is bound to have consequences on the ground.

Currently, the ECB is eager to kickstart bank lending to the real economy under efforts to nurture growth in the crisis-hit eurozone. At the same time, however, the central bank must have a vested interest in banks raising their core capital to guard against balance sheet risks. The easiest way for banks to limit exposure to risk, though, is through restrictive lending to companies and customers - plunging the ECB into a classic conflict of targets.

Moreover, it may well happen that the central bankers in Frankfurt will shore up insolvent banks with an asset-buying program, while under normal circumstances they would be forced to shut them down under a mandate to keep the sector healthy. And to make the conflict even worse, any decision to lower or hike interest rates in the euro area will directly impact on bank revenues, rendering the concept of independent oversight opaque.

It is only cold comfort for the European public that EU leaders have included a rule that bars the ECB officials from making monetary policy decisions and those dealing with banking supervision in one and the same governing council meeting. The ECB itself claims that the two policy fields are being kept strictly separate both factually and personal, and that they would merge only at the very top of the central bank.

However, the fish rots from the head down, as they say - a graphic reminder of the problem with Europe's Banca Schizophrenia, formerly known as the ECB.