Inside the five-month-old union between monetary policy and financial oversight at the European Central Bank, nerves are beginning to fray.
As officials under ECB President Mario Draghi seek to replace deposits fleeing Greek banks without blatantly financing the state, the efforts of the institution’s new Single Supervisory Mechanism to do its part are irking the old guard. Central bankers say they are concerned that overly-strict orders to lenders could worsen the Greek turmoil.
After building an institutional pillar that has supervised the euro area’s largest banks since November, the ECB is now facing one of the worst flare-ups in six years of sovereign-debt crisis. Officials must work out how to align their two policy arms in a way that can find a path through the Greek turmoil and set a template for handling banking turbulence to come.
“Clearly there is tension, and it was obvious from the beginning that there would be,” said Nicolas Veron, a fellow at the Brussels-based Bruegel research group. “But there’s a productive kind of tension, like there was between Treasury Secretary Tim Geithner and Federal Deposit Insurance Corporation Chair Sheila Bair in 2008. It could end up creating the right mix of policy.”
Just as those U.S. policy makers in the 2008 financial crisis had to choose between the moral hazard of bailing out banks and the economic chaos of watching them fail, European officials are trapped between giving in to Greek cash demands and the political debacle of letting the country leave the euro.
That stress is bubbling up inside the ECB, affecting the interaction between central bankers in their new premises in Frankfurt’s east end, and bank supervisors installed in a temporary home two kilometers away.
SSM Chair Daniele Nouy may give clues on the relationship with the Governing Council when she testifies to the European Parliament on Tuesday.
Her officials sought this month to prevent Greek banks from increasing holdings of short-term government debt, hours before critical meetings including Prime Minister Alexis Tsipras and Draghi. The move, which makes it harder for the state to fund itself, initially floundered as the ECB’s Governing Council balked at its severity and the monetary-policy goals that it referred to, according to people familiar with the discussions.
From the supervisory point of view, the proposal reflected the ECB’s restrictions on Emergency Liquidity Assistance for the Greek banking system. Since last month, the Governing Council has approved only small weekly increases in central- bank cash to its lenders, on concern funds might be used directly to buy illiquid government debt, violating European Union law.
For some central bankers, the SSM proposal was a clumsy intervention in crisis policy that threatened to upset the Governing Council’s measured strategy of addressing the Greek turmoil, according to officials familiar with the discussions. They asked not to be named as the matter isn’t public.
While the motion passed later with narrower terms of reference, the spat underlines a tension simmering within the ECB. Its supervisors can claim the 25-member Governing Council and its staff don’t understand the messy business of bank oversight, with the possible retort that the supervisors, ticking regulatory boxes, don’t get the world beyond banking law.
With around 6,000 supervisory decisions annually to be made by the SSM and approved by the council, the potential for conflict or mistakes is significant. An ECB spokeswoman declined to comment on its policy toward Greece and the interactions between the Governing Council and supervisors.
The strictness and complexity of the ECB’s approach to Greece has attracted criticism from the country’s politicians.
“The ECB is still holding onto the rope that is around our necks,” Tsipras said in an interview with Der Spiegel on March 7. By refusing to allow room for Greece to issue more treasury bills, the ECB “is taking on a major responsibility.”
Time is running out for Greece to present a detailed account of economic reform measures needed to satisfy creditors and unlock bailout funds. The government is expected to present its proposals by Monday, as its cash reserves dwindle.
In the meantime, ECB officials face the tricky task of maintaining adherence to the EU’s prohibition against it funding member states, while fielding acute uncertainty unleashed by a government that has admitted it’s bankrupt.
The ECB is “worried about monetary financing, and as a supervisor it doesn’t like the amount of sovereign exposure,” said Dimitris Drakopoulos, euro-area economist at Nomura International Plc in London. “As the solvency of the banks depends on the economic and fiscal policies of the government, they have to keep a tight rein on it. Their policy is consistent on both sides.”