The Commission’s proposals for European banking union aim to minimise the risk to taxpayers from problems in the banking sector and break the link between individual countries and their own banking systems, particularly in the eurozone, writes David Strachan of Deloitte Centre for Regulatory Strategy

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The Commission’s proposals for European banking union aim to minimise the risk to taxpayers from problems in the banking sector and break the link between individual countries and their own banking systems, particularly in the eurozone.

In the first instance the debate will be political. However, it is essential that the enormous practical challenges, including for banks operating across the EU, are properly thought through. The Commission’s report will have to answer four questions.

Firstly, while it is self-evident that the banking union will include all eurozone countries, what will be the basis on which other member states are allowed or obliged to deal with it?

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Secondly, another crucial piece of the jigsaw is the overarching supervisory model. Will the European Central Bank (ECB), as the banking union supervisor, be a hands-on supervisor or delegate so that it oversees activities carried out by existing national supervisors, or a bit of both, depending on the systemic and cross-border nature of the bank concerned? There needs to be absolute clarity here, particularly on the division of tasks between the various parties involved.

How many other new institutions will there eventually be? The European Banking Authority seems set to continue as the rule-making authority, including for the banking union, and exercising a critical role as guardian of the single rulebook and Single Market. But there is also a case for a resolution authority for the banking union and a deposit insurance authority. On the one hand, the more institutions there are, the greater the scope for confusion. On the other, the more power is concentrated in a single body such as the ECB, the greater the concerns about governance and accountability.

This leads to the biggest question: Who’s in charge in a crisis? In the UK the Government has proposed giving the Chancellor the authority to direct the Bank of England when, in a resolution, taxpayers’ funds are put at risk. Would a similar, "last resort" political power over the ECB, if it were also to be the resolution authority, be acceptable and who would wield that power?