Address by Governor Patrick Honohan to the David Hume Institute and the Scottish Institute for Research in Economics, Edinburgh Post author By Philip Lane Post date November 13, 2012 Text and slides available here. Categories In Uncategorized 9 Comments on Address by Governor Patrick Honohan to the David Hume Institute and the Scottish Institute for Research in Economics, Edinburgh ← Some insights from the ISAs → A Visual Representation of the MIP 9 replies on “Address by Governor Patrick Honohan to the David Hume Institute and the Scottish Institute for Research in Economics, Edinburgh” According to Eurointelligence Daily Briefing 7 November: The biggest story in our area is the continued attempt to dilute the role of the Single Supervisory Mechanism (SSM) at the expense of national bank supervisors. Borsenzeitung has seen the latest draft of the Cypriot EU presidency paper on banking union. The main point is that they want to leave all banks under national supervision if their assets account for less than half the country’s total banking assets – which basically means that there cannot be more than one systemically relevant bank per country. The paper has obtained a copy of the draft, which includes some specific details about the relationship between the ECB and national supervisors. As we reported already, the ECB will directly supervise a small number of large banks and those that have received funding from the ESM. The article notes that EU lawyers had questioned the lack of a definition of systemically relevant, and have now come up with this “less than half the total banking assets” definition (which is, of course, economically illiterate). The article also notes an additional difference between the European Commission’s proposals and the presidency paper. The former defined the national supervisors as junior to the ECB. The latter defines them as equal partners. A footnote considers the idea to replace the expression “Single Supervisory Mechanism” with “European System of Banking Supervision”, presumably analogous to the ECB itself. (The Cypriot presidency is essentially killing off the entire idea of an SSM. It confirms our original prognosis that eurozone member states are not willing to accept a proper banking union. This is going to be another institutional fudge. Back to business as usual in Brussels.) There is an implicit assumption in Prof Honohan’s words that Euro 2.0 will work when the groundwork is laid. Unfortunately to get to that stage will require another significant Greek debt write off, – the currrent scale of public debt in Greece is not sustainable, most likely an Irish banking debt write down, a believable Spanish deal of some nature on their banking debt and most likely a write off in Portugal as their economy is stuck is go slow mode most likely for another decade. These are serious and significantly large hurdles for Euro 1.0 to cross before Euro 2.0 can even be contemplated. My guess is some of the countries above will fall at the aforementioned hurdle and after that your guess is as good as mine as to where the Euro project heads. I sincerely doubt however that Euro 2.0 as envisaged by Prof Honohan will still be on the menu at that stage. Section: The ECB response; So that was what happened, was it? @ Paul Quigley FYI http://ftalphaville.ft.com/tag/banking-union/ Half a loaf is better than no bread! It seems likley that a basic enabling text will be agreed which will reconcile the differences between Paris and Berlin. But the time-table will be that set by Merkel. Professor Honohan gives a nuanced view on the significance of a common deposit insurance scheme (a point on which Draghi has already conceded to the German view). The key issue, it seems to me, is how to reconcile two opposing realities (i) the physical impossibility for the ECB to supervise all EA banks directly (ii) the need for the fundamental legal authority for supervision, nevertheless, to rest with it. I doubt if it is beyond the skill of the legal eagles to come up with an appropriate wording. If they fail to do so, the new arrangements will, indeed, be an empty shell. Which would defeat the entire purpose of the exercise. Why do you use the word “Governor” as it it were a personal title rather than a job he holds? title is cut and paste from central bank website Hmmm … useful overview … ‘Commitment Device’ enters the discourse; worth noting that The Governor did not mention ‘Burning the Bounty’ as an exemplar! fyi Default option It is time to revisit the default option. … The default option is economically efficient, it is fair, and it is politically sensible. It may be the only way to hold together an unsustainable structure that threatens to drive deeper divisions and set back the magnificent integration project on which Europe has embarked. http://www.irishtimes.com/newspaper/opinion/2012/1114/1224326574017.html Ashoka Mody is Charles and Marie Robertson visiting professor of international economic policy at the Woodrow Wilson school, Princeton University. He was a deputy director in the IMF’s research department @ Yields or Bust I have to agree that the time table for implementation will prove terminal for countries whose economies remain static at best in terms of growth and who will become even more zombified as the process moves along at a glacial pace. Honohan …”but market and indeed general public confidence in the system has taken such a knock that to insist on it would surely be to tie one’s hands behind one’s back also during the transition. For this reason alone the task must be seen as the creation of a much more robust regime for the long haul.” But then, we get a timetable of the long haul, that suggests at the earliest the a single supervisory mechanism will begin to be phased in sometime in 2013 and, that the the other elements envisaged viz. a common deposit scheme and common resolution agency will come much later. When your economy is burning down it is cold comfort to the Greeks, Irish, Portuguese, Spanish that a new financial fire safety system is being designed and prototyped to try and address the earlier systemic deficiencies. The ‘general public confidence in the system’ will inevitably take a further battering. It sounds more like too little too late, then we have Schauble telling us Germany;s preference is to deal with the bigger systemic banks first and foremost. A bit like having a single supervisory mechanism for “some” banks. One consequence of this would be to give these systemic banks an even greater competitive advantage in terms of attracting deposits and selling bonds over their smaller, non systemic rivals. The new flaws are beginning to show already. Comments are closed.