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Sunday, April 14, 2013

European Central Bank As Supervisor: Conflicts of Interest

Wolfgang Schäuble, the German finance minister, raised additional concerns in April 2013 about a proposal to create a single banking supervisor for the European Union. About 150 large banks would be under the direct supervision of the European Central Bank, which would also have the power to intervene to oversee smaller lenders. This proposal had been set as a precondition for states to draw on the E.U.’s bailout fund, the European Stability Mechanism, to recapitalize struggling lenders directly. To analyze Schäuble’s potential stumbling blocks, it is necessary to understand the conflicts of interest that are involved.
                                                                                 Wolfgang Schäuble, the German finance minister, active at the E.U. level. Source: The Telegraph.
First, at the time Schäuble made known that Germany had additional concerns, he was expected to ask for more scope for the state legislatures to hold the E.C.B. accountable. Because he was a minister of the Bundestag at the time, there is an institutional conflict of interest involved in him holding back a federal amendment unless the Bundestag gets more authority in holding the E.C.B. accountable. Put more simply, his proposal could be a power-grab for himself and his colleagues in the Bundestag. This conflict of interest would not exist if the state legislatures already did not enjoy so much power at the federal level through the European Council.
There would be no such conflict of interest were Schäuble to propose that the European Parliament have greater authority to hold the E.C.B. accountable in its role as bank supervisor. As the members of the EP are directly elected by the citizens of the E.U., this alternative would reduce the democracy deficit, which has been a criticism of the E.U. more generally. One federal body would be holding another one accountable. To the extent that the state governments already hold too much power in the E.U.’s legislative process, turning to the EP rather than the European Council (or the state legislatures) would be a step toward balance in terms of state vs. federal competencies (i.e., domains of authority).  
On the other hand, the example of the U.S. shows how centuries can allow for consolidation at the federal level, with the state governments being relegated to local matters. To forestall the E.U. from going down this path, permitting a majority of state legislatures to act as a check on a federal body would be a step in the right direction. Similarly, the justices sitting on the E.C.J. could be sitting state constitutional court justices so the state level is not forgotten in federal jurisprudence.
Increasing the direct involvement of state legislatures at the federal level could be consistent with moving toward a balance in state vs. federal power. If the state legislatures are to hold the E.C.B. accountable as a federal regulator of banks, additional competencies, such as taxation on a qualified majority basis, could be granted to the E.U., and the use of the veto on the Council circumscribed more generally. This would reduce the likelihood of institutional conflicts of interest when a particular state objects to a federal proposal.
Second, Schäuble was expected to propose that the E.C.B.’s supervisory and monetary roles be clearly separated. Here, the institutional conflict of interest applies not to Schäuble or Germany, but to the E.C.B. itself. Where the central bank’s monetary policy conflicts with the bank’s supervision of the banks, the latter should not be allowed to interfere with the former, and vice versa. The danger here is that the proposed separation would be a mere firewall, which the highest officials at the bank could overrun by using their authority over both divisions.
Alternatively, another federal regulatory body could be created to supervise the banks, while the E.C.B. concentrates on monetary policy. Lest the European Stability Mechanism introduce too much politics in the central bank, the new regulatory body could handle the bailout too, which would include holding the banks receiving funds accountable in how the funds are used. This was a major oversight in the bailout legislation passed by Congress in 2008; the banks could do virtually whatever they wanted with the taxpayer money.
In conclusion, careful attention to institutional conflicts of interest can indeed be a salient part of public policy analysis. It is necessary to first identify the potential conflicts, which in turn requires knowing what an institutional conflict of interest is. Ideally, a federal system of governance should have no institutional conflicts of interest. If left in the system, such conflicts have a tendency to corrupt the system over time.

Source:

James Kanter, “New Concerns From Germany Over European Banking Supervisor,” The New York Times, April 12, 2013.