Anyone with a general interest in European affairs must surely be aware that since the recent crisis the EU, like most major governments around the World, took keenly to regulating its financial system. Not everyone, though, is aware that its regulatory framework is taking shape just as those words are being typed. Let us start with a bit of history. In 2009 (which now feels like a decade ago), a group of experts under the auspices of the EU led by Jacques de Larosiére published an influential report calling for a set of new, more powerful central regulatory authorities. Those authorities came to be known as the ESFS, the European System of Financial Supervisors, and became operative in 2011. Soon afterwards, a proposal for a yet larger regulatory system, a Banking Union, has been submitted by the European Commission. The BU was designed to encompass three key elements: a Single Supervisory Mechanism, a Single Resolution Mechanism and a common deposit guarantee. The SSM is already here – or rather is set to be functional by the end of 2014, following the September 12th 2013, vote in the European Parliament. The SSM essentially reorganises the ESFS around the European Central Bank as the core institution responsible for the enforcement and oversight of all European banks. This oversight will be direct only for some institutions (those deemed to be systemically important, a benchmark figure being EUR 30 bn in assets), but the regulatory rules and principles imbedded in the upcoming Single Rulebook issued by the European Banking Authority (we do not expect queues in the bookstores), will be binding for all the Europe’s banks. And, given that the SR is already set to encompass the Basel III capital requirements, we can only expect less leverage across all the European markets – which can only be healthy for some, yet rather pitiful for the others. Furthermore, a common regulatory framework for a set of economies which since 2007 became increasingly divergent with regards to their business cycles and detached in terms of cross-border financial linkages is a somewhat chilling concept in itself. The SRM is yet more uncertain – while the general form of the proposal to be voted on has been agreed upon on December 19th (2013), the vote itself is only scheduled for the upcoming April. Rather unsurprisingly, a political battle is taking place right now, as the December proposal failed to attract sufficient support to ensure its smooth passing. If the vote won’t take place this April, the entire project will see a serious delay, at least until the next session of the EP, following the May elections. While the core idea behind the SRM (breaking the link between the weak sovereign states and weak banks through allowing for such banks to be resolved centrally) is – in our opinion – quite correct, an important issue remains unsolved: funding. The initial idea of using the ESM (European Stability Mechanism) funds to make SRM functional by 2016 was rejected by Germany, the ESM’s core financial force. On a somewhat different note, ESM faces a separate set of charges in the German Federal Constitutional Court, with a ruling possibly pulling Germany out of the ESM entirely set for March 18. As of now, with a central deposit guarantee scheme beyond the horizon, we risk a rather unsettling scenario: the Europe’s banks being bound by a set of rigorous rules, yet supported by no common resolution mechanism. A general comment that comes to mind, is that the EU and its institutions promote integration as both an economic tool and a political end – of which effects are still to be seen. Image courtesy of m_bartosch / FreeDigitalPhotos.net